<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange
Act of 1934
(Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/X/ Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
FHP INTERNATIONAL CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(a)(f), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-5(i)(4) and 0-11.
1. Title of each class of securities to which transaction applies:
----------------------------------------------------------------------
2. Aggregate number of securities to which transaction applies:
----------------------------------------------------------------------
3. Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
----------------------------------------------------------------------
4. Proposed maximum aggregate value of transaction:
----------------------------------------------------------------------
5. Total fee paid:
----------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/X/ Check box if any part of the fee is offset as provided by Exchange Act Rule
D-11(a)(2) and identify the fling for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
of the Form of Schedule and the date of its filing.
The aggregate fee of $1,097,837.74 was paid with two prior filings. A fee of
$931,903.15 was paid by the PacifiCare Health Systems, Inc. with its preliminary
proxy materials filed under Schedule 14A on September 18, 1996. A fee of
$165,934.59 was paid by N-T Holdings, Inc. as a registration fee for its
Registration Statement 333-16271 filed on November 18, 1996.
<PAGE>
FHP INTERNATIONAL CORPORATION
[LOGO]
3120 LAKE CENTER DRIVE
SANTA ANA, CALIFORNIA 92704
November 21, 1996
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders (the
"FHP Meeting") of FHP International Corporation ("FHP") to be held at the FHP
University Building, 3515 Harbor Boulevard, Costa Mesa, California 92626, on
December 31, 1996, at 2:00 p.m., Pacific Standard Time.
At this meeting you will be asked to consider and vote upon, among other
proposals, the approval and adoption of a proposed acquisition transaction (the
"Transaction") involving PacifiCare Health Systems, Inc., ("PacifiCare") and
FHP. Upon consummation of the Transaction: (i) each of PacifiCare and FHP will
become a wholly owned subsidiary of PacifiCare Holding; (ii) each outstanding
share of FHP Common Stock will be converted into the right to receive $17.50 in
cash and a mix of PacifiCare Holding Class A Common and PacifiCare Holding Class
B Common determined by a formula described in the attached Joint Proxy
Statement/Prospectus; (iii) each outstanding share of FHP Preferred Stock will
be converted into the right to receive either (a) $14.113 in cash and 0.50
shares of PacifiCare Holding Series A Preferred Stock, assuming approval of an
amendment to the FHP Certificate of Incorporation (the "Series A Amendment") or
an irrevocable election by the holder of such share to receive such
consideration whether or not the Series A Amendment is approved (an "Irrevocable
Election"), or (b) if the Series A Amendment is not approved and an Irrevocable
Election as to such share is not made, (1) $25.00 in cash, (2) a mix of cash,
PacifiCare Holding Class A Common and PacifiCare Holding Class B Common
determined by a formula described in the attached Joint Proxy
Statement/Prospectus or (3) the consideration that would have been received had
the FHP Preferred Stock been converted into FHP Common Stock immediately prior
to the consummation of the Transaction; and (iv) each outstanding share of FHP
Common Stock and FHP Preferred Stock will be converted in part into rights
("Talbert Rights"), to purchase a proportionate share (on an as-if-converted
basis) of all of FHP's holdings in Talbert Medical Management Corporation and
Talbert Health Services Corporation. The offering of Talbert Rights will be
commenced promptly after consummation of the Transaction (or as soon thereafter
as legally permissable) and the Talbert Rights will be exercisable for 30 days.
In connection with the Transaction, existing holders of PacifiCare Common Stock
will exchange their shares for shares of PacifiCare Holding on a share for share
basis.
You will also be asked to consider and approve the adoption of the Series A
Amendment to: (i) exempt the FHP Merger from a requirement of the existing FHP
Certificate of Incorporation that, in the event of a merger or consolidation of
FHP, the holders of FHP Preferred Stock are entitled to receive upon conversion
thereof the same consideration per share as the consideration per share they
would have received in the event they converted their FHP Preferred Stock into
FHP Common Stock immediately prior to such merger or consolidation; and (ii)
provide that the holders of FHP Preferred Stock are not entitled to Special
Conversion Rights (as defined in the existing FHP Certificate of Incorporation)
as a result of the FHP Merger. Holders of FHP Preferred Stock desiring to
receive the same consideration such holders would receive assuming approval of
the Series A Amendment whether or not the Series A Amendment is approved may
irrevocably elect to receive such consideration by completing and returning the
Form of Irrevocable Election accompanying these proxy materials in accordance
with the instructions set forth therein, on or before December 27, 1996.
The Transaction is contingent upon, among other things, the approval of the
common stockholders of FHP and PacifiCare and the receipt of required regulatory
approvals. The Transaction would be consummated shortly after such approvals are
obtained and the other conditions to the Transaction are satisfied or waived,
which is currently expected to occur in early January 1997.
YOUR BOARD OF DIRECTORS BELIEVES THAT THE TRANSACTION IS IN THE BEST
INTERESTS OF FHP AND ITS STOCKHOLDERS, AND WILL CREATE A STRONG NEW COMBINED
COMPANY. YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE TRANSACTION AND
RECOMMENDS THAT YOU VOTE FOR THE TRANSACTION AND FOR THE SERIES A AMENDMENT.
<PAGE>
Attached is a Joint Proxy Statement/Prospectus which provides you with a
detailed description of, among other things, the FHP Meeting, the Transaction,
the Series A Amendment and the Irrevocable Election.
Whether or not you plan to attend the FHP Meeting or make an Irrevocable
Election, PLEASE COMPLETE, SIGN AND DATE THE ACCOMPANYING PROXY AND RETURN IT IN
THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE. If you are present at the FHP
Meeting, you may, of course, vote your shares in person.
Very truly yours,
- --------------------------------------------------------------------------------
Westcott W. Price III
VICE CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
NOTICE TO PARTICIPANTS
IN THE
FHP INTERNATIONAL CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN
Ladies and Gentlemen:
As a participant in the FHP International Corporation ("FHP") Employee Stock
Ownership Plan (the "Plan"), you have certain rights in FHP Common Stock. This
entitles you to exercise "voting rights" as described below.
At the Annual Meeting of the Stockholders (the "FHP Meeting") of FHP to be
held at the FHP University Building, 3515 Harbor Boulevard, Costa Mesa,
California 92626, on December 31, 1996, at 2:00 p.m., Pacific Standard Time, FHP
stockholders will be asked to consider and vote upon, among other proposals, the
approval and adoption of a proposed acquisition transaction (the "Transaction")
involving PacifiCare Health Systems, Inc., ("PacifiCare") and FHP. Upon
consummation of the Transaction: (i) each of PacifiCare and FHP will become a
wholly owned subsidiary of PacifiCare Holding; (ii) each outstanding share of
FHP Common Stock will be converted into the right to receive $17.50 in cash and
a mix of PacifiCare Holding Class A Common and PacifiCare Holding Class B Common
determined by a formula described in the attached Joint Proxy
Statement/Prospectus; (iii) each outstanding share of FHP Preferred Stock will
be converted into the right to receive either (a) $14.113 in cash and 0.50
shares of PacifiCare Holding Series A Preferred Stock, assuming approval of an
amendment to the FHP Certificate of Incorporation (the "Series A Amendment") or
an irrevocable election by the holder of such share to receive such
consideration whether or not the Series A Amendment is approved (an "Irrevocable
Election"), or (b) if the Series A Amendment is not approved and an Irrevocable
Election as to such share is not made, (1) $25.00 in cash, (2) a mix of cash,
PacifiCare Holding Class A Common and PacifiCare Holding Class B Common
determined by a formula described in the attached Joint Proxy
Statement/Prospectus or (3) the consideration that would have been received had
the FHP Preferred Stock been converted into FHP Common Stock immediately prior
to the Transaction; and (iv) each outstanding share of FHP Common Stock and FHP
Preferred Stock will be converted in part into rights ("Talbert Rights"), to
purchase a proportionate share (on an as-if-converted basis) of all of FHP's
holdings in Talbert Medical Management Corporation and Talbert Health Services
Corporation. The offering of Talbert Rights will be commenced promptly after
consummation of the Transaction (or as soon thereafter as legally permissible)
and the Talbert Rights will be exercisable for 30 days. In connection with the
Transaction, existing holders of PacifiCare Common Stock will exchange their
shares for shares of PacifiCare Holding on a share-for-share basis.
You will also be asked to consider and approve the adoption of the Series A
Amendment to: (i) exempt the FHP Merger from a requirement of the existing FHP
Certificate of Incorporation that, in the event of a merger or consolidation of
FHP, the holders of FHP Preferred Stock are entitled to receive upon conversion
thereof the same consideration per share as the consideration per share they
would have received in the event they converted their FHP Preferred Stock into
FHP Common Stock immediately prior to such merger or consolidation; and (ii)
provide that the holders of FHP Preferred Stock are not entitled to Special
Conversion Rights (as defined in the existing FHP Certificate of Incorporation)
as a result of the FHP Merger.
The Transaction is contingent upon, among other things, the approval of the
common stockholders of FHP and PacifiCare and the receipt of required regulatory
approvals. The Transaction would be consummated shortly after such approvals are
obtained and the other conditions to the Transaction are satisfied or waived,
which is currently expected to occur in early January 1997.
Wells Fargo Bank is the trustee (the "Trustee") of the Plan and holds all
shares of stock of FHP now in the Plan (the "Shares"). The Plan requires the
Trustee to solicit voting instructions from you and to vote the Shares in
accordance with your instructions. Under the Plan, you are designated as a
"named fiduciary" for voting purposes and, as a named fiduciary, you are
entitled to instruct the Trustee as to how to vote (i) all Shares allocated to
your Plan account and (ii) a proportionate number of unallocated Shares held by
the Plan for future allocation to participants' accounts. You may direct
<PAGE>
the Trustee to vote both the allocated and unallocated Shares by completing,
signing and returning the enclosed voting instruction card. If you want your
voting instructions to be limited only to the Shares allocated to your accounts,
you should mark the box on the instruction card labelled "ALLOCATED SHARES
ONLY."
You should understand that by signing and returning the enclosed instruction
card, you are accepting the designation as a named fiduciary of the Plan.
Accordingly, you should exercise your voting rights prudently and, with respect
to unallocated Shares, in a manner intended to benefit all participants.
CONFIDENTIAL INSTRUCTIONS
For your information, as explained in the attached Joint Proxy
Statement/Prospectus, the Board of Directors unanimously recommends a vote FOR
the Transaction, FOR the Series A Amendment, FOR election of the three directors
nominated by the Board of Directors and FOR the ratification of the appointment
of the Independent Auditors. However, the Trustee makes no recommendation with
respect to your voting decisions. IN YOUR COMPLETE DISCRETION, YOU MAY FOLLOW
THE FHP BOARD OF DIRECTORS' RECOMMENDATIONS OR YOU MAY VOTE DIFFERENTLY ON ANY
OR ALL ISSUES. As provided in the Plan, your voting instructions will be kept
confidential and will not be disclosed by the Trustee to any person, except as
may be necessary to tabulate your voting instructions.
COMPLETING YOUR VOTING
American Stock Transfer & Trust Company has been asked to receive and
tabulate your voting instructions to the Trustee. In order for your voting
instructions to the Trustee to be effective, you must complete, sign and date
the enclosed instruction card and return it to American Stock Transfer & Trust
Company in the enclosed pre-addressed envelope. Your instruction card must be
received no later than the close of business on December 30, 1996.
HOW THE VOTES ARE COUNTED
IF THE TRUSTEE RECEIVES AN INSTRUCTION CARD FROM YOU ON TIME, IT WILL VOTE
YOUR ALLOCATED SHARES AND YOUR PROPORTIONATE SHARE OF THE UNALLOCATED SHARES AS
YOU INSTRUCT. IF THE TRUSTEE DOES NOT RECEIVE AN INSTRUCTION CARD FROM YOU ON
TIME, THE TRUSTEE WILL VOTE YOUR ALLOCATED SHARES AND YOUR PROPORTIONATE SHARE
OF THE UNALLOCATED SHARES IN ACCORDANCE WITH THE INSTRUCTIONS OF THE OTHER
PARTICIPANTS WHO PROVIDE TIMELY VOTING INSTRUCTIONS TO THE TRUSTEE. IF YOU SIGN
AND TIMELY RETURN AN INSTRUCTION CARD WITHOUT INDICATING A VOTE, THE TRUSTEE
WILL VOTE YOUR ALLOCATED SHARES AND YOUR PROPORTIONATE SHARE OF THE UNALLOCATED
SHARES IN ACCORDANCE WITH THE FHP BOARD OF DIRECTORS' RECOMMENDATIONS LISTED
ABOVE.
As an example of proportionate voting of allocated and unallocated Shares
for which an instruction card is not returned, assume on a particular issue the
Trustee receives a total of 80 "FOR" votes and 20 "AGAINST" votes from all of
the participants who complete and return instruction cards on time. The Trustee
will vote 80% of the allocated and unallocated Shares for which an instruction
card was not returned as a "FOR" vote and 20% of the allocated and unallocated
Shares for which an instruction card is not returned as an "AGAINST" vote on
that issue.
Attached is a Joint Proxy Statement/Prospectus which provides you with a
detailed description of, among other things, the FHP Meeting, the Transaction
and the Series A Amendment. PLEASE COMPLETE, SIGN AND DATE THE ACCOMPANYING
INSTRUCTION CARD AND RETURN IT IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO
POSTAGE.
Dated: November 21, 1996
WELLS FARGO BANK (Trustee)
<PAGE>
[LOGO]
FHP INTERNATIONAL CORPORATION
3120 LAKE CENTER DRIVE
SANTA ANA, CALIFORNIA 92704
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 31, 1996
------------------------
TO THE STOCKHOLDERS OF FHP INTERNATIONAL CORPORATION:
The Annual Meeting of Stockholders of FHP International Corporation, a
Delaware corporation ("FHP"), will be held at the FHP University Building, 3515
Harbor Boulevard, Costa Mesa, California 92626, on December 31, 1996, at 2:00
p.m., Pacific Standard Time, to consider and vote on the following matters
described in the Joint Proxy Statement/Prospectus:
1. The approval and adoption of the Amended and Restated Agreement and Plan
of Reorganization, dated as of November 11, 1996, among PacifiCare Health
Systems, Inc., a Delaware corporation ("PacifiCare"), N-T Holdings, Inc.,
a Delaware corporation ("PacifiCare Holding"), Neptune Merger Corp., a
Delaware corporation and wholly owned subsidiary of PacifiCare Holding
("PacifiCare Merger Sub"), Tree Acquisition Corp., a Delaware corporation
and wholly owned subsidiary of PacifiCare Holding ("FHP Merger Sub"), and
FHP (the "Reorganization Agreement"), a copy of which is set forth as
Appendix A to the attached Joint Proxy Statement/Prospectus. Pursuant to
the Reorganization Agreement, among other things: (i) PacifiCare Merger
Sub will be merged with and into PacifiCare; (ii) FHP Merger Sub will be
merged with and into FHP (the "FHP Merger"); and (iii) each of PacifiCare
and FHP will become a wholly owned subsidiary of PacifiCare Holding.
2. The approval and adoption of an amendment to the Restated Certificate of
Incorporation of FHP (the "Series A Amendment") to: (i) exempt the FHP
Merger from a requirement of the existing FHP Certificate of
Incorporation that, in the event of a merger or consolidation of FHP, the
holders of FHP Series A Cumulative Convertible Preferred Stock ("FHP
Preferred Stock") are entitled to receive upon conversion thereof the
same consideration per share as the consideration per share they would
have received in the event they converted their FHP Preferred Stock into
FHP Common Stock immediately prior to such merger or consolidation; and
(ii) provide that the holders of FHP Preferred Stock are not entitled to
Special Conversion Rights (as defined in the existing FHP Certificate of
Incorporation) as a result of the FHP Merger.
3. To elect three directors to hold office for three-year terms.
4. To ratify the appointment of independent auditors.
5. To transact such other business as may properly come before the meeting,
or any adjournments or postponements thereof.
The Board of Directors has fixed the close of business on November 8, 1996
as the record date for determining stockholders entitled to receive notice of
and to vote at the meeting and at any adjournment or postponement thereof.
Holders of FHP Common Stock are entitled to vote on all matters to be considered
at the Annual Meeting. Holders of FHP Preferred Stock are entitled to vote on
the approval and adoption of the Series A Amendment. All stockholders are
cordially invited to attend the Annual Meeting in person. Whether or not you
plan to attend the Annual Meeting, you are urged to COMPLETE, DATE AND SIGN THE
ENCLOSED PROXY AND RETURN IT AT YOUR EARLIEST CONVENIENCE IN THE ENCLOSED
ENVELOPE. If you attend the Annual Meeting and wish to vote your own shares in
person, you may withdraw your proxy at that time.
By Order of the Board of Directors,
Westcott W. Price III
VICE CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Santa Ana, California
November 21, 1996
<PAGE>
PACIFICARE HEALTH SYSTEMS, INC.
AND
FHP INTERNATIONAL CORPORATION
----------------
JOINT PROXY STATEMENT
FOR STOCKHOLDERS MEETINGS TO BE HELD ON DECEMBER 31, 1996
---------------------
N-T HOLDINGS, INC.
PROSPECTUS
This Joint Proxy Statement/Prospectus is being furnished to holders of
PacifiCare Class A Common Stock and PacifiCare Class B Common Stock in
connection with the solicitation of proxies by the PacifiCare Board of Directors
in connection with the PacifiCare Meeting, and to holders of FHP Common Stock
and holders of FHP Preferred Stock in connection with the solicitation of
proxies by the FHP Board of Directors for use at the FHP Meeting.
The Meetings are each being called to consider and vote upon, among other
things, a proposal to approve and adopt the Reorganization Agreement. The
Reorganization Agreement provides for, among other things, an acquisition
transaction involving PacifiCare and FHP by means of the merger of PacifiCare
Merger Sub with and into PacifiCare and the merger of FHP Merger Sub with and
into FHP. As a result, PacifiCare and FHP will become wholly owned subsidiaries
of PacifiCare Holding and the stockholders of PacifiCare and FHP will become
stockholders of PacifiCare Holding. Upon consummation of the Mergers: (i) each
outstanding share of PacifiCare Class A Common Stock will be converted into the
right to receive one share of PacifiCare Holding Class A Common; (ii) each
outstanding share of PacifiCare Class B Common Stock will be converted into the
right to receive one share of PacifiCare Holding Class B Common; (iii) each
outstanding share of FHP Common Stock will be converted into the right to
receive $17.50 in cash and a mix of PacifiCare Holding Class A Common and
PacifiCare Holding Class B Common as determined in the Reorganization Agreement;
and (iv) each outstanding share of FHP Preferred Stock will be converted into
the right to receive either (a) $14.113 in cash and 0.50 shares of PacifiCare
Holding Preferred, assuming approval of the Series A Amendment or an Irrevocable
Election by the holder of such share, or (b) if the Series A Amendment is not
approved and an Irrevocable Election as to such share is not made, (1) $25.00 in
cash, (2) a mix of cash, PacifiCare Holding Class A Common and PacifiCare
Holding Class B Common determined by a formula described in the attached Joint
Proxy Statement/Prospectus or (3) the consideration that would have been
received had the FHP Preferred Stock been converted into FHP Common Stock
immediately prior to the Effective Time. By virtue of the Mergers, each
outstanding share of FHP Common Stock and FHP Preferred Stock will be converted
in part into Talbert Rights to purchase a proportionate share (on an
as-if-converted basis) of all of FHP's ownership interest in Talbert. The
offering of Talbert Rights will be commenced promptly after consummation of the
Mergers (or as soon thereafter as legally permissible) and the Talbert Rights
will be exercisable for 30 days.
This Joint Proxy Statement/Prospectus is also being furnished: (i) to
holders of PacifiCare Common Stock to consider and vote upon the approval and
adoption of the PacifiCare Amendment to exempt the PacifiCare Merger from a
requirement of the PacifiCare Certificate of Incorporation that, in the event of
a merger or consolidation of PacifiCare, the holders of PacifiCare Class B
Common Stock receive the same consideration per share as the consideration per
share for the PacifiCare Class A Common Stock in such merger or consolidation;
(ii) to holders of PacifiCare Class A Common Stock to consider and vote upon the
approval and adoption of the Second Amended PacifiCare Directors Plan; (iii) to
holders of FHP Capital Stock to consider and vote upon the adoption of the
Series A Amendment to provide for exemption of the FHP Merger from a requirement
that the holders of FHP Preferred Stock, in the event of a merger or
consolidation of FHP, receive the same consideration per share as the
consideration they would have received if they had converted their shares into
FHP Common Stock immediately prior to the effectiveness of such merger or
consolidation, and from a requirement that such holders receive certain special
conversion rights in connection
<PAGE>
with the FHP Merger; and (iv) to holders of FHP Common Stock to consider and
vote upon, (a) the election of three directors of FHP to hold office for
three-year terms and (b) the ratification of the appointment of independent
auditors.
The proposed Mergers are contingent upon, among other things, the approval
of the holders of PacifiCare Class A Common Stock, PacifiCare Class B Common
Stock and FHP Common Stock and the receipt of required regulatory approvals. The
proposed Mergers will be consummated shortly after such approvals are obtained
and the other conditions to the Mergers are satisfied or waived, which is
currently expected to be in early January 1997.
All information contained or incorporated by reference herein concerning
PacifiCare has been furnished by PacifiCare, and all information contained or
incorporated by reference herein concerning FHP and Talbert has been furnished
by FHP and Talbert, respectively.
Certain capitalized terms are defined in the Glossary.
This Joint Proxy Statement/Prospectus and the accompanying forms of proxy
and Form of Irrevocable Election are first being mailed to stockholders of each
of PacifiCare and FHP on or about November 25, 1996.
------------------------
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS JOINT PROXY STATEMENT/
PROSPECTUS. THE PROPOSED MERGERS ARE COMPLEX TRANSACTIONS. STOCKHOLDERS OF FHP
AND PACIFICARE ARE STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS JOINT
PROXY STATEMENT/PROSPECTUS IN ITS ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO
UNDER "RISK FACTORS" BEGINNING AT PAGE 19.
------------------------
THE SECURITIES TO BE ISSUED IN CONNECTION WITH THE MERGERS HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
The date of this Joint Proxy Statement/Prospectus is November 21, 1996.
ii
<PAGE>
AVAILABLE INFORMATION
Each of PacifiCare and FHP is subject to the informational requirements of
the Exchange Act, and in accordance therewith files reports, proxy statements
and other information with the Commission. The reports, proxy statements and
other information filed by each of PacifiCare and FHP with the Commission may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well
as at the Commission's regional offices at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such material may also be obtained from the Commission at
prescribed rates by writing to the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549.
This Joint Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits thereto
filed by PacifiCare Holding, certain portions of which have been omitted
pursuant to the rules and regulations of the Commission and to which portions
reference is hereby made for further information with respect to PacifiCare
Holding, PacifiCare, FHP, the Mergers, the securities offered hereby and related
matters. The Registration Statement and the exhibits thereto may be inspected
without charge at the offices of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies may be obtained from the Commission at
prescribed rates.
The Commission maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission. The address of the site is
http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission (Commission
file number 0-14181) by PacifiCare pursuant to the Exchange Act are incorporated
by reference into this Joint Proxy Statement/Prospectus:
1. PacifiCare's Annual Report on Forms 10-K and 10-K/A for the fiscal year
ended September 30, 1995;
2. PacifiCare's Quarterly Reports on Form 10-Q for the quarterly periods
ended December 31, 1995 and March 31, 1996, and Forms 10-Q and 10-Q/A for
the quarterly period ended June 30, 1996; and
3. PacifiCare's Current Report on Form 8-K filed on September 23, 1996.
The following documents previously filed with the Commission (Commission
file number 0-14796) by FHP pursuant to the Exchange Act are incorporated by
reference into this Joint Proxy Statement/Prospectus:
1. FHP's Annual Report on Form 10-K for the fiscal year ended June 30, 1996
(excluding Item 8);
2. FHP's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1996; and
3. FHP's Current Reports on Form 8-K filed on August 19, 1996 and September
24, 1996.
The information relating to PacifiCare and FHP contained in this Joint Proxy
Statement/
Prospectus does not purport to be comprehensive and should be read together with
the information in the documents incorporated by reference herein.
All documents filed by PacifiCare and FHP pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Joint Proxy
Statement/Prospectus and prior to the date of the PacifiCare Meeting and the FHP
Meeting shall be deemed to be incorporated by reference into this Joint Proxy
Statement/Prospectus and to be a part hereof from the dates of filing such
documents or
iii
<PAGE>
reports. Any statement contained herein or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Joint Proxy Statement/Prospectus to the extent
that a statement contained herein or in any other subsequently filed document
which is also incorporated or is deemed to be incorporated herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Joint Proxy Statement/Prospectus.
------------------------
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER
THAN CERTAIN EXHIBITS TO DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE) ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON TO WHOM A
COPY OF THIS JOINT PROXY STATEMENT/PROSPECTUS HAS BEEN DELIVERED UPON WRITTEN OR
ORAL REQUEST, IN THE CASE OF PACIFICARE DOCUMENTS, TO PACIFICARE HEALTH SYSTEMS,
INC., 5995 PLAZA DRIVE, CYPRESS, CALIFORNIA 90630-5028, ATTENTION: INVESTOR
RELATIONS, TELEPHONE NUMBER (714) 952-1121, AND, IN THE CASE OF FHP DOCUMENTS,
TO FHP INTERNATIONAL CORPORATION, P.O. BOX 25186, SANTA ANA, CALIFORNIA
92799-5186, ATTENTION: INVESTOR RELATIONS DEPARTMENT, TELEPHONE NUMBER (714)
825-6600. IN ORDER TO ENSURE DELIVERY PRIOR TO THE MEETINGS, REQUESTS SHOULD BE
RECEIVED BY DECEMBER 23, 1996.
------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE OFFERING AND THE SOLICITATIONS MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY PACIFICARE OR FHP. THIS JOINT PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO PURCHASE, ANY SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY INFERENCE THAT THERE HAS NOT BEEN ANY CHANGE
IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF EITHER PACIFICARE OR
FHP SINCE THE DATE HEREOF.
iv
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
AVAILABLE INFORMATION...................................................................................... iii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................................................ iii
GLOSSARY................................................................................................... viii
SUMMARY.................................................................................................... 1
The Companies............................................................................................ 1
The PacifiCare Special Meeting........................................................................... 1
The FHP Annual Meeting................................................................................... 3
The Mergers and Related Transactions..................................................................... 5
Risk Factors............................................................................................. 11
Market Prices............................................................................................ 11
Selected Historical and Pro Forma Financial and Operating Data........................................... 12
Comparative Per Share Data............................................................................... 18
RISK FACTORS............................................................................................... 19
Risk Factors Related to the Business of PacifiCare....................................................... 19
Risk Factors Related to the Business of FHP.............................................................. 21
Common Risk Factors Related to the Mergers............................................................... 22
THE COMPANIES.............................................................................................. 24
PacifiCare Holding....................................................................................... 24
PacifiCare............................................................................................... 24
FHP...................................................................................................... 24
THE PACIFICARE MEETING..................................................................................... 26
Purpose of the PacifiCare Meeting........................................................................ 26
Date, Time and Place of Meeting.......................................................................... 26
Record Date and Outstanding Shares....................................................................... 26
Voting of Proxies........................................................................................ 26
Vote Required............................................................................................ 26
Board Recommendations.................................................................................... 27
Quorum; Abstentions; Broker Non-Votes.................................................................... 27
Solicitation of Proxies and Expenses..................................................................... 27
Availability of Accountants.............................................................................. 27
THE FHP MEETING............................................................................................ 28
Purpose of the FHP Meeting............................................................................... 28
Date, Time and Place of Meeting.......................................................................... 28
Record Date and Outstanding Shares....................................................................... 28
Voting of Proxies........................................................................................ 28
Vote Required of FHP Common Stock........................................................................ 28
Vote Required of FHP Preferred Stock..................................................................... 29
Effect of Failure to Approve the Series A Amendment...................................................... 30
Board Recommendations.................................................................................... 30
Quorum; Abstentions; Broker Non-Votes.................................................................... 30
Solicitation of Proxies and Expenses..................................................................... 30
THE MERGERS AND RELATED TRANSACTIONS....................................................................... 31
Merger Consideration..................................................................................... 31
Background of the Mergers................................................................................ 35
Recommendations of the Boards of Directors and Reasons for the Mergers................................... 37
Opinions of Financial Advisors........................................................................... 43
Financing of FHP Merger Consideration.................................................................... 50
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Conversion of Shares; Procedures for Exchange of Certificates; No Fractional Shares...................... 52
Talbert Rights Offering.................................................................................. 54
Regulatory Matters....................................................................................... 58
Estimated Synergies...................................................................................... 60
Factors for Forward Looking Information.................................................................. 61
Stock Options; Benefit Plans............................................................................. 62
Voting and Non-Disposition Agreements.................................................................... 64
Affiliate Agreements..................................................................................... 65
Interests of Certain Persons in the Mergers.............................................................. 65
Dividends................................................................................................ 67
Nasdaq National Market................................................................................... 67
Merger Expenses and Fees and Other Costs................................................................. 68
Accounting Treatment..................................................................................... 68
Certain Federal Income Tax Consequences.................................................................. 68
Appraisal Rights......................................................................................... 73
THE REORGANIZATION AGREEMENT............................................................................... 76
General.................................................................................................. 76
Merger Consideration..................................................................................... 76
Corporate Matters........................................................................................ 76
Conditions to the Mergers................................................................................ 77
Representations and Warranties........................................................................... 78
Certain Covenants........................................................................................ 79
Non-Solicitation......................................................................................... 81
Indemnification and Insurance............................................................................ 81
Termination.............................................................................................. 82
Expenses and Termination Fees............................................................................ 83
No Survival of Representations and Warranties............................................................ 83
Amendment; Waiver........................................................................................ 83
AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF PACIFICARE................................................ 84
AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF FHP....................................................... 85
UNAUDITED PRO FORMA FINANCIAL INFORMATION.................................................................. 86
DESCRIPTION OF PACIFICARE HOLDING CAPITAL STOCK............................................................ 96
PacifiCare Holding Class A Common and Class B Common..................................................... 96
PacifiCare Holding Preferred............................................................................. 98
COMPARISON OF RIGHTS OF STOCKHOLDERS....................................................................... 104
Comparison of Stockholder Rights with Respect to PacifiCare Holding and PacifiCare....................... 104
Comparison of Stockholder Rights with Respect to PacifiCare Holding and FHP.............................. 104
MANAGEMENT OF PACIFICARE HOLDING........................................................................... 108
Directors................................................................................................ 108
Committees of the PacifiCare Holding Board of Directors.................................................. 111
Compensation of Directors................................................................................ 111
Executive Officers....................................................................................... 112
Compensation of Executive Officers....................................................................... 112
OWNERSHIP OF PACIFICARE, FHP AND PACIFICARE HOLDING........................................................ 113
PacifiCare............................................................................................... 113
FHP...................................................................................................... 116
PacifiCare Holding....................................................................................... 118
SECOND AMENDED PACIFICARE DIRECTORS PLAN................................................................... 119
</TABLE>
vi
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
OTHER INFORMATION FOR THE FHP MEETING...................................................................... 121
Election of Directors.................................................................................... 121
Nonemployee Director Compensation........................................................................ 124
Executive Compensation................................................................................... 126
Change in Control Employment Agreements.................................................................. 129
Compensation Committee Report on Executive Compensation for the Fiscal Year Ended June 30, 1996.......... 129
FHP Compensation Committee Interlocks and Insider Participation.......................................... 131
Performance Graph of FHP................................................................................. 132
Appointment of Independent Auditors...................................................................... 132
Additional Information................................................................................... 133
EXPERTS.................................................................................................... 133
LEGAL MATTERS.............................................................................................. 133
FUTURE STOCKHOLDER PROPOSALS............................................................................... 134
REPORT OF INDEPENDENT AUDITORS............................................................................. F-1
N-T HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET............................................. F-2
N-T HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED BALANCE SHEET.................................... F-3
FHP INTERNATIONAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS............................................ F-4
APPENDICES:
APPENDIX A -- Amended and Restated Agreement and Plan of Reorganization, dated as of November 11, 1996
APPENDIX B -- Fairness Opinion of Dillon, Read & Co. Inc., dated as of August 30, 1996
APPENDIX C -- Fairness Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated, dated as of August 4, 1996
APPENDIX D -- Delaware Statutes Regarding Appraisal Rights
APPENDIX E -- Second Amended 1992 Non-Officer Directors Stock Option Plan of PacifiCare Health Systems,
Inc.
</TABLE>
vii
<PAGE>
GLOSSARY
1995 ACQUISITIONS. PacifiCare's fiscal year 1995 acquisitions of Preferred
Solutions, ValuCare and Pacific Health Plans.
ACQUISITION PROPOSAL. See definition on page 81.
ACQUISITIONS. The Mergers and the 1995 Acquisitions, together.
ACT. The Securities Act of 1933, as amended.
ANTITRUST DIVISION. The Antitrust Division of the United States Department of
Justice.
AS-IF-CONVERTED FHP MERGER CONSIDERATION. The consideration to be received by
the holders of FHP Preferred Stock if the Series A Amendment is not approved and
if the holders do not exercise their Special Conversion Rights or make
Irrevocable Elections. These holders will receive consideration upon surrender
of their FHP Preferred Stock as if they had converted their FHP Preferred Stock
into FHP Common Stock immediately prior to the Effective Time.
AST. American Stock Transfer & Trust Company, the transfer agent for FHP.
AVERAGE CLOSING PRICE OF PACIFICARE CLASS B COMMON STOCK. The average closing
price of PacifiCare Class B Common Stock as quoted in the Wall Street Journal
for the 20 trading days prior to the trading day immediately before the date of
the FHP Meeting.
BANK OF AMERICA. Bank of America National Trust and Savings Association.
CAPITATION FEE. A negotiated per capita fee paid periodically, usually monthly,
to a health care provider based on the number of HMO members who have selected
such health care provider.
CAPITATION CONTRACT. A contract between an HMO and a health care provider
involving the compensation of the health care provider through Capitation Fees.
CASH CONSIDERATION. The aggregate amount of cash payable to the holders of FHP
Capital Stock in connection with the FHP Merger, other than cash payable to
holders who exercise and perfect appraisal rights under the DGCL.
CLOSING. The closing under the Reorganization Agreement.
CLOSING PRICE/SIGNING PRICE RATIO. See definition on page 31.
CODE. The Internal Revenue Code of 1986, as amended.
COMMISSION. The Securities and Exchange Commission.
CONVERSION NOTICE. The notice delivered by FHP in accordance with the FHP
Certificate in connection with a "Change of Control" (as defined in the FHP
Certificate). If the Series A Amendment is not approved, a Conversion Notice
will be delivered to all holders of FHP Preferred Stock other than those who
have made an Irrevocable Election with respect to all of their FHP Preferred
Stock.
CREDIT AGREEMENT. See definition on page 50.
DGCL. The Delaware General Corporation Law.
DILLON READ. Dillon, Read & Co. Inc., financial advisor to PacifiCare.
DILLON READ OPINION. Written opinion of Dillon Read for the PacifiCare Board of
Directors, dated as of August 30, 1996.
EFFECTIVE TIME. The effective time of the Mergers as provided in the
Reorganization Agreement.
EPS. Earnings per share.
ESOP. The FHP Employee Stock Ownership Plan.
EXCHANGE ACT. The Securities Exchange Act of 1934, as amended.
viii
<PAGE>
EXCHANGE AGENT. ChaseMellon Shareholder Services L.L.C.
FEHBP. The Federal Employees Health Benefits Program, a program providing for
managed health care services to federal employees, annuitants and their
dependents under commercial contracts between health care services organizations
and OPM.
FHP. FHP International Corporation, a Delaware corporation.
FHP CAPITAL STOCK. The FHP Common Stock and FHP Preferred Stock, together.
FHP CERTIFICATE. The Restated Certificate of Incorporation of FHP.
FHP COMMON STOCK. The Common Stock, $0.05 par value, of FHP.
FHP MEETING. FHP's Annual Meeting of Stockholders or any adjournment or
postponement thereof, at which the approval of the FHP Merger will be
considered.
FHP MERGER. The merger of FHP Merger Sub with and into FHP.
FHP MERGER SUB. Tree Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of PacifiCare Holding.
FHP OPTIONS. Options to purchase FHP Common Stock.
FHP PREFERRED STOCK. The Series A Cumulative Convertible Preferred Stock, $0.05
par value, of FHP.
FHP RECORD DATE. The close of business on November 8, 1996. Holders of FHP
Capital Stock on this date are entitled to vote at the FHP Meeting.
FHP REQUIRED VOTE. The affirmative vote of the holders of a majority of the
outstanding shares of FHP Common Stock entitled to vote to approve and adopt the
Reorganization Agreement.
FHP STOCKHOLDER VOTING AGREEMENTS. See definition on page 29.
FHP SURVIVING CORPORATION. FHP, as the surviving corporation of the FHP Merger.
FINAL CLASS A/COMMON SHARE RATIO. See definition on page 31
FINAL CLASS B/COMMON SHARE RATIO. See definition on page 31.
FINAL EXCHANGE RATIO. See definition on page 31.
FIRST AMENDED REORGANIZATION AGREEMENT. The Amended and Restated Agreement and
Plan of Reorganization, dated as of September 17, 1996, among PacifiCare,
PacifiCare Holding, PacifiCare Merger Sub, FHP Merger Sub and FHP.
FTC. The Federal Trade Commission.
GROUP MODEL HMO. An HMO that contracts with one large multi-specialty medical
group, which typically receives a Capitation Fee for each HMO member who has
selected such health care provider, regardless of the number of physician
visits.
HCFA. The Health Care Financing Administration, a federal agency which
administers the provision of services to Medicare beneficiaries.
HMO. A health maintenance organization.
HSR ACT. The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
IRREVOCABLE ELECTION. An irrevocable election on the part of a holder of FHP
Preferred Stock to receive the Series A Merger Consideration whether or not the
Series A Amendment is approved.
IRREVOCABLE ELECTION DEADLINE. 5:00 p.m., Eastern Standard Time, on December
27, 1996.
IRS. Internal Revenue Service.
ix
<PAGE>
LIBOR. The London interbank offered rate at which Eurodollar deposits are
offered in the London interbank market.
MEETINGS. The FHP Meeting and PacifiCare Meeting, together.
MERGERS. The FHP Merger and the PacifiCare Merger, together.
MERRILL LYNCH. Merrill Lynch, Pierce, Fenner & Smith Incorporated, financial
advisor to FHP.
MERRILL LYNCH OPINION. The opinion of Merrill Lynch to the FHP Board of
Directors dated as of August 4, 1996.
MULTIPLIER. See definition on page 31.
NYSE. New York Stock Exchange.
NETWORK MODEL HMO. An HMO that contracts with more than one medical group to
provide services generally for Capitation Fees.
OPM. The Office of Personnel Management, a federal agency which administers
managed health care services for federal employees, annuitants, and their
dependents.
ORIGINAL REORGANIZATION AGREEMENT. The Agreement and Plan of Reorganization,
dated as of August 4, 1996, among PacifiCare, PacifiCare Holding, PacifiCare
Merger Sub, FHP Merger Sub and FHP.
OTHER PERSONS. See definition on page 29.
PPO. An organization of providers of health care services which contracts with
HMOs and other payors to provide health care services at discounted fee for
service rates generally in exchange for prompt payment and anticipated increases
in patient volume. Providers under such contracts are referred to as preferred
providers.
PACIFICARE. PacifiCare Health Systems, Inc., a Delaware corporation.
PACIFICARE AMENDMENT. An amendment to the PacifiCare Certificate to exempt the
PacifiCare Merger from a requirement of the PacifiCare Certificate that, in the
event of a merger or consolidation of PacifiCare, the holders of PacifiCare
Class B Common Stock shall receive the same consideration per share as the
consideration per share for the PacifiCare Class A Common Stock in such merger
or consolidation.
PACIFICARE CERTIFICATE. The Certificate of Incorporation of PacifiCare, as
amended.
PACIFICARE CLASS A COMMON STOCK. Class A Common Stock, $0.01 par value, of
PacifiCare.
PACIFICARE CLASS B COMMON STOCK. Class B Common Stock, $0.01 par value, of
PacifiCare.
PACIFICARE COMMON STOCK. The PacifiCare Class A Common Stock and PacifiCare
Class B Common Stock, together.
PACIFICARE DIRECTORS STOCK OPTION PLAN. The Amended 1992 Non-Officer Directors
Stock Option Plan of PacifiCare Health Systems, Inc.
PACIFICARE HOLDING. N-T Holdings, Inc., a Delaware corporation. Upon
consummation of the Mergers, PacifiCare Holding will be the parent of FHP and
PacifiCare.
PACIFICARE HOLDING CAPITAL STOCK. The PacifiCare Holding Common and the
PacifiCare Holding Preferred, together.
PACIFICARE HOLDING CLASS A COMMON. Class A Common Stock, $0.01 par value, of
PacifiCare Holding.
PACIFICARE HOLDING CLASS B COMMON. Class B Common Stock, $0.01 par value, of
PacifiCare Holding. PacifiCare Holding Class B Common has limited voting rights.
x
<PAGE>
PACIFICARE HOLDING COMMON. The PacifiCare Holding Class A Common and PacifiCare
Holding Class B Common, together.
PACIFICARE HOLDING PREFERRED. Series A Cumulative Convertible Preferred Stock,
$0.01 par value, of PacifiCare Holding.
PACIFICARE MEETING. PacifiCare's Special Meeting of Stockholders or any
adjournment or postponement thereof, at which the approval of the PacifiCare
Merger and the PacifiCare Amendment will be considered.
PACIFICARE MERGER. The merger of PacifiCare Merger Sub with and into
PacifiCare.
PACIFICARE MERGER SUB. Neptune Merger Corp., a Delaware corporation and a
wholly owned subsidiary of PacifiCare Holding.
PACIFICARE RECORD DATE. The close of business on November 11, 1996. Holders of
PacifiCare Common Stock on this date are eligible to vote at the PacifiCare
Meeting.
PACIFICARE REQUIRED VOTE. The affirmative vote of the holders of a majority of
the outstanding shares of PacifiCare Class A Common Stock entitled to vote to
approve and adopt the Reorganization Agreement and the affirmative vote of the
holders of a majority of the outstanding shares of PacifiCare Class A Common
Stock entitled to vote and the holders of a majority of the outstanding shares
of PacifiCare Class B Common Stock entitled to vote, each voting separately as a
class, to approve and adopt the PacifiCare Amendment.
PACIFICARE SPECIAL COMMITTEE. The Special Opportunities Committee of the
PacifiCare Board of Directors, which is comprised of three independent
directors.
PACIFICARE SURVIVING CORPORATION. PacifiCare, as the surviving corporation of
the PacifiCare Merger.
REORGANIZATION AGREEMENT. The Amended and Restated Agreement and Plan of
Reorganization, dated as of November 11, 1996, among PacifiCare, PacifiCare
Holding, PacifiCare Merger Sub, FHP Merger Sub and FHP.
RESTATED CERTIFICATE. The Amended and Restated Certificate of Incorporation of
PacifiCare Holding to be effective if the Series A Amendment is approved. The
Restated Certificate is attached to the Reorganization Agreement as Exhibit 1.4.
RESTRUCTURING PLAN. A plan to restructure the operations of FHP announced in
June 1995.
SECOND AMENDED PACIFICARE DIRECTORS PLAN. The Second Amended 1992 Non-Officer
Directors Stock Option Plan of PacifiCare Health Systems, Inc.
SECOND REQUEST. A request for additional information and documentary materials
issued by the FTC or Antitrust Division pursuant to the HSR Act.
SECTION 351. Section 351 of the Code.
SERIES A AMENDMENT. An amendment to the FHP Certificate to: (i) exempt the FHP
Merger from a requirement of the existing FHP Certificate that, in the event of
a merger or consolidation of FHP, the holders of FHP Preferred Stock are
entitled to receive upon conversion thereof the same consideration per share as
the consideration per share they would have received in the event they converted
their FHP Preferred Stock into FHP Common Stock immediately prior to such merger
or consolidation; and (ii) provide that the holders of FHP Preferred Stock are
not entitled to Special Conversion Rights (as defined in the existing FHP
Certificate) as a result of the FHP Merger.
SERIES A MERGER CONSIDERATION. See definition on page 32.
SERIES A REQUIRED VOTE. The affirmative vote of the holders of a majority of
the outstanding shares of FHP Common Stock entitled to vote and the holders of
66 2/3% of the outstanding shares of FHP Preferred Stock entitled to vote, each
voting separately as a class, to approve and adopt the Series A Amendment.
xi
<PAGE>
STAFF MODEL HMO. An HMO that employs physicians to provide health care to its
members. All premiums and other revenues accrue to the HMO, which compensates
physicians.
STATED VALUE. Twenty-five dollars ($25.00).
SURVIVING CORPORATIONS. FHP Surviving Corporation and PacifiCare Surviving
Corporation, together.
TALBERT. The combined businesses of TMMC and THSC and, if TMMHC acquires such
companies, TMMHC.
TALBERT RIGHTS. Rights to purchase, in aggregate, 2,767,500 shares of common
stock of TMMHC or TMMC, as the case may be.
TALBERT RIGHTS OFFERING. The offering of the Talbert Rights to the holders of
FHP Capital Stock as part of the consideration payable in the FHP Merger.
THSC. Talbert Health Services Corporation, a Delaware corporation.
TMMC. Talbert Medical Management Corporation, a Delaware corporation.
TMMHC. Talbert Medical Management Holdings Corporation, a Delaware corporation
which may be formed to acquire all of the shares of TMMC and THSC owned by FHP.
UNIHEALTH. A California nonprofit public benefit corporation, and the parent
corporation in a multi-state health care delivery system consisting of seven
nonprofit medical centers and various for-profit health care companies,
including one HMO.
UNIHEALTH VOTING AGREEMENT. See definition on page 27.
xii
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS JOINT PROXY STATEMENT/PROSPECTUS. THIS SUMMARY IS NOT, AND IS NOT INTENDED
TO BE, COMPLETE BY ITSELF. THIS JOINT PROXY STATEMENT/PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. PACIFICARE'S
AND FHP'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE MORE DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS JOINT PROXY STATEMENT/
PROSPECTUS, THE APPENDICES ATTACHED HERETO AND THE DOCUMENTS REFERRED TO OR
INCORPORATED BY REFERENCE HEREIN. STOCKHOLDERS OF PACIFICARE AND FHP ARE URGED
TO REVIEW CAREFULLY ALL OF THE INFORMATION CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, THE REORGANIZATION AGREEMENT ATTACHED AS APPENDIX A AND
THE OTHER APPENDICES ATTACHED HERETO. CERTAIN CAPITALIZED TERMS ARE DEFINED IN
THE GLOSSARY.
THE COMPANIES
<TABLE>
<S> <C>
PacifiCare Holding................ PacifiCare Holding is a newly formed Delaware
corporation. It has conducted no business other than
that incident to its formation, its execution of the
Reorganization Agreement, the making of various
regulatory filings in connection with the Mergers and
the preparation of this Joint Proxy
Statement/Prospectus. Upon consummation of the Mergers,
it will be the parent of both PacifiCare and FHP and its
business will be that currently conducted by PacifiCare
and FHP. The full name, address and telephone number of
PacifiCare Holding are: N-T Holdings, Inc., c/o
PacifiCare Health Systems, Inc., 5995 Plaza Drive,
Cypress, California 90630, (714) 952-1121. See "The
Companies -- PacifiCare Holding."
PacifiCare........................ PacifiCare, a Delaware corporation, is one of the
nation's leading managed health care services companies,
and is a leader in the management, development and
marketing of diversified HMO products and related
services. The full name, address and telephone number of
PacifiCare are: PacifiCare Health Systems, Inc., 5995
Plaza Drive, Cypress, California 90630, (714) 952-1121.
See "The Companies -- PacifiCare."
FHP............................... FHP, a Delaware corporation, is one of the nation's
leading managed health care companies. Through its
subsidiaries, it delivers managed health care services
and sells indemnity health, group life and workers'
compensation insurance. The full name, address and
telephone number of FHP are: FHP International
Corporation, 3120 Lake Center Drive, Santa Ana,
California 92704, (714) 825-6600. See "The Companies --
FHP."
THE PACIFICARE SPECIAL MEETING
Time, Date and Place.............. A special meeting of the stockholders of PacifiCare will
be held at the offices of PacifiCare, 5995 Plaza Drive,
Cypress, California 90630 on Tuesday, December 31, 1996
at 10:00 a.m., Pacific Standard Time.
Matters to be Considered at the
PacifiCare Meeting.............. At the PacifiCare Meeting, the stockholders of
PacifiCare will be asked to vote upon the approval and
adoption of the Reorganization Agreement, the PacifiCare
Amendment and the Second Amended PacifiCare Directors
Plan.
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
Vote Required..................... Approval and adoption of the Reorganization Agreement
requires the affirmative vote of holders of a majority
of the outstanding shares of PacifiCare Class A Common
Stock entitled to vote. Approval and adoption of the
PacifiCare Amendment requires the affirmative vote of
holders of a majority of the outstanding shares of
PacifiCare Class A Common Stock entitled to vote and a
majority of the outstanding shares of PacifiCare Class B
Common Stock entitled to vote, each voting as a separate
class. Approval and adoption of the Second Amended
PacifiCare Directors Plan requires the affirmative vote
of a majority of the outstanding shares of PacifiCare
Class A Common Stock voting.
Recommendation of the PacifiCare
Board of Directors.............. The PacifiCare Board of Directors believes that the
terms of the Reorganization Agreement are in the best
interests of PacifiCare and its stockholders and that
the Mergers will create a strong new combined company.
The PacifiCare Board of Directors has unanimously
approved the Reorganization Agreement, the PacifiCare
Amendment and the Second Amended PacifiCare Directors
Plan and recommends a vote FOR the approval and adoption
of the Reorganization Agreement, FOR the approval and
adoption of the PacifiCare Amendment and FOR the
approval and adoption of the Second Amended PacifiCare
Directors Plan. See "The Mergers and Related
Transactions -- Recommendations of the Boards of
Directors and Reasons for the Mergers -- PacifiCare."
Opinion of Financial Advisor...... Dillon Read has delivered its written opinion to the
PacifiCare Board of Directors to the effect that, as of
its date and subject to the various limitations and
assumptions set forth therein, the consideration to be
paid to the holders of FHP Capital Stock pursuant to the
First Amended Reorganization Agreement was fair to
PacifiCare and its stockholders from a financial point
of view. See "The Merger and Related Transactions --
Opinions of Financial Advisors -- Opinion of Dillon
Read."
UniHealth Voting Agreement........ As of the PacifiCare Record Date, UniHealth held
approximately 47.7% of the outstanding PacifiCare Class
A Common Stock. Pursuant to the UniHealth Voting
Agreement, UniHealth has agreed to vote such shares in
favor of approval and adoption of the Reorganization
Agreement and the approval and adoption of the
PacifiCare Amendment, and has delivered to FHP an
irrevocable proxy with respect to the same. UniHealth
has indicated that it intends to vote the shares of
PacifiCare Class B Common Stock it holds, representing
approximately 1.5% of the outstanding shares of such
class at the PacifiCare Record Date, in favor of
approval and adoption of the PacifiCare Amendment. See
"The Merger and Related Transactions -- Voting and
Non-Disposition Agreements."
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Record Date; Shares Outstanding
and Entitled to Vote............ The PacifiCare Record Date is November 11, 1996. On that
date there were outstanding 12,379,658 shares of
PacifiCare Class A Common Stock and 18,912,018 shares of
PacifiCare Class B Common Stock.
Security Ownership of Directors,
Executive Officers and their
Affiliates...................... At the PacifiCare Record Date, directors and executive
officers of PacifiCare and their affiliates (other than
UniHealth) owned approximately 2.0% of PacifiCare Class
A Common Stock then outstanding and approximately 1.0%
of PacifiCare Class B Common Stock then outstanding.
Such stockholders have indicated that they intend to
vote their shares in favor of approval and adoption of
the Reorganization Agreement and in favor of approval
and adoption of the PacifiCare Amendment. As noted
above, UniHealth owned approximately 47.7% and 1.5% of
the PacifiCare Class A Common Stock and PacifiCare Class
B Common Stock then outstanding, respectively. UniHealth
has entered into a voting agreement with respect to such
PacifiCare Class A Common Stock. See "Ownership of
PacifiCare, FHP and PacifiCare Holding."
Second Amended PacifiCare
Directors Plan.................. See "Second Amended PacifiCare Directors Plan" for a
discussion of the proposed amendments to the plan.
THE FHP ANNUAL MEETING
Time, Date and Place.............. The annual meeting of FHP will take place at FHP
University Building, 3515 Harbor Boulevard, Costa Mesa,
California 92626 on December 31, 1996 at 2:00 p.m.,
Pacific Standard Time.
Matters to be Considered at the
FHP Meeting..................... At the FHP Meeting, the stockholders of FHP will be
asked to consider and vote upon the following proposals:
(i) the adoption and approval of the Reorganization
Agreement; (ii) the adoption and approval of the Series
A Amendment; (iii) the election of three directors to
hold office for three-year terms; and (iv) the
ratification of the appointment of independent auditors.
Vote Required..................... Approval and adoption of the Reorganization Agreement
requires the affirmative vote of a majority of the
outstanding shares of FHP Common Stock entitled to vote.
Approval and adoption of the Series A Amendment requires
the affirmative vote of a majority of the outstanding
shares of FHP Common Stock entitled to vote and 66 2/3%
of the outstanding shares of FHP Preferred Stock
entitled to vote (including shares of FHP Preferred
Stock as to which Irrevocable Elections have been made).
Directors will be elected by a plurality of the votes
cast by the holders of FHP Common Stock. Ratification of
the appointment of the independent auditors requires the
affirmative vote of a majority of the votes cast by
holders of FHP Common Stock present and entitled to
vote.
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Irrevocable Election by Holders of
FHP Preferred Stock............. By following the procedures described herein, holders of
FHP Preferred Stock may make an Irrevocable Election to
receive the Series A Merger Consideration, whether or
not the Series A Amendment is approved. Holders of FHP
Preferred Stock desiring to make an Irrevocable Election
should complete the Form of Irrevocable Election
accompanying this Joint Proxy Statement/Prospectus in
accordance with the instructions set forth in such form
and transmit the Form of Irrevocable Election and all
documents required thereby to AST, no later than the
Irrevocable Election Deadline. If AST has not received a
properly completed Form of Irrevocable Election,
accompanied by all required documents, by the
Irrevocable Election Deadline (unless the procedures for
guaranteed delivery are followed and such certificates
are received by AST by the third business day after the
Irrevocable Election Deadline), the Irrevocable Election
will not be effective. See "The Mergers and Related
Transactions -- Merger Consideration -- FHP --
Irrevocable Election by FHP Preferred Stockholders."
Effect of the Failure to Approve
the Series A Amendment.......... Approval of the Series A Amendment is not a condition to
the completion of the FHP Merger. If the Series A
Amendment is not approved and the Mergers are
consummated, holders of FHP Preferred Stock who have not
made an Irrevocable Election will have the right to
exercise special conversion rights or to receive the
same consideration as such holders would have received
had the FHP Preferred Stock been converted into FHP
Common Stock immediately prior to the Effective Time.
See "The Merger and Related Transactions -- Merger
Consideration -- FHP Preferred Stock."
Recommendation of the FHP Board of
Directors....................... The FHP Board of Directors believes that the terms of
the Reorganization Agreement and the Series A Amendment
are in the best interests of FHP and its stockholders
and that the Mergers will create a strong new combined
company. By unanimous vote, the FHP Board of Directors
has approved the Reorganization Agreement and the Series
A Amendment and recommends a vote FOR approval and
adoption of the Reorganization Agreement, FOR approval
and adoption of the Series A Amendment, FOR election of
the three nominees identified herein and FOR
ratification of the appointment of independent auditors.
See 'The Mergers and Related Transactions --
Recommendations of the Boards of Directors and Reasons
for the Merger -- FHP."
Opinion of the Financial
Advisor......................... Merrill Lynch has delivered its written opinion to the
FHP Board of Directors to the effect that, as of the
date of the Original Reorganization Agreement and
subject to the various assumptions and limitations set
forth therein, the proposed consideration to be received
in the Mergers by the holders of FHP Capital Stock was
fair to such holders from a financial point of view. In
addition, Merrill Lynch has reviewed the First Amended
Reorganization Agreement and
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
the Reorganization Agreement and determined that the
changes reflected therein did not require any
modification to their opinion. See "The Merger and
Related Transactions -- Opinions of Financial Advisors
-- Opinion of Merrill Lynch."
FHP Stockholder Voting
Agreements...................... Jack R. Anderson, Richard M. Burdge, Sr. and Westcott W.
Price III have entered into the FHP Stockholder Voting
Agreements with respect to shares beneficially owned by
them and by certain Other Persons. As of the FHP Record
Date, Messrs. Anderson, Burdge and Price, collectively,
beneficially owned and were entitled to vote
approximately 2.4% of the outstanding FHP Common Stock
and approximately 9.8% of the outstanding FHP Preferred
Stock, and the Other Persons, collectively, beneficially
owned and were entitled to vote approximately 1.2% of
the outstanding FHP Common Stock and approximately 6.9%
of the outstanding FHP Preferred Stock. Pursuant to such
agreements, Messrs. Anderson, Burdge and Price have: (i)
agreed to vote and to use their best efforts to cause
the Other Persons to vote their respective shares in
favor of the Reorganization Agreement and the Series A
Amendment; and (ii) granted proxies and caused the Other
Persons to grant proxies to PacifiCare with respect to
the same. See "The Mergers and Related Transactions --
Voting and Non-Disposition Agreements."
Record Date, Shares Outstanding
and Entitled to Vote............ The FHP Record Date is November 8, 1996. On that date
there were outstanding 41,214,595 shares of FHP Common
Stock and 21,035,804 shares of FHP Preferred Stock.
Voting of ESOP Shares............. Each participant in the ESOP is entitled to instruct the
ESOP trustee on how to vote all shares allocated to such
participant's account under the ESOP, and a
proportionate number of unallocated shares held by the
ESOP for future allocations to such participant's
account. See "The FHP Meeting -- Vote Required of FHP
Common Stock."
Security Ownership of Directors,
Executive Officers and their
Affiliates...................... As of the FHP Record Date, directors and executive
officers of FHP and their affiliates and Other Persons
beneficially owned and were entitled to vote
approximately 4.2% of FHP Common Stock then outstanding
and approximately 17.4% of FHP Preferred Stock then
outstanding. Such stockholders have indicated that they
intend to vote their shares in favor of the
Reorganization Agreement and the Series A Amendment. See
"Ownership of PacifiCare, FHP and PacifiCare Holding."
THE MERGERS AND RELATED TRANSACTIONS
General........................... At the Effective Time, subsidiaries of PacifiCare
Holding will be merged with and into PacifiCare and FHP.
PacifiCare and FHP will thereupon become wholly owned
subsidiaries of PacifiCare Holding and the stockholders
of each of PacifiCare and FHP will receive the
consideration described below.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Effect on Holders of FHP Common
Stock........................... At the Effective Time, each share of FHP Common Stock
will be converted into the right to receive $17.50 in
cash, a mix of PacifiCare Holding Class A Common and
PacifiCare Holding Class B Common, and Talbert Rights.
The fraction of a share of PacifiCare Holding Class A
Common to be received will be equal to the quotient of
2,350,000 divided by the number of shares of FHP Common
Stock outstanding immediately prior to the Effective
Time plus, if the Series A Amendment is not approved,
the number of shares of FHP Common Stock into which the
outstanding FHP Preferred Stock could be converted at
that time (excluding shares of FHP Preferred Stock for
which an Irrevocable Election is made). The fraction of
a share of PacifiCare Holding Class B Common to be
received is determined by a formula, which may be found
on page 31 of this Joint Proxy Statement/Prospectus. The
formula is based in part on the average closing price of
the PacifiCare Class B Common Stock during the 20
trading days ending with the trading day prior to the
FHP Meeting. The following tables set forth these
fractions assuming certain values for the "Average
Closing Prices of PacifiCare Class B Common Stock," an
assumed number of shares of FHP Common Stock and FHP
Preferred Stock outstanding, and assuming the Series A
Amendment is approved:
</TABLE>
<TABLE>
<CAPTION>
AVERAGE CLOSING PRICE FINAL CLASS A/ FINAL CLASS B/ FINAL
OF PACIFICARE CLASS B COMMON SHARE COMMON SHARE EXCHANGE
COMMON STOCK RATIO RATIO RATIO
--------------------- ------------------- ------------------- -----------
<S> <C> <C> <C> <C>
$88.40 or above .057 .172 .229
$80.00 .057 .188 .245
$62.90 to $73.10 .057 .201 .258
$55.00 .057 .216 .273
$47.60 or less .057 .230 .287
</TABLE>
<TABLE>
<S> <C>
The following table shows the same fractions assuming
that the Series A Amendment is not approved and that no
holder of FHP Preferred Stock has made an Irrevocable
Election:
</TABLE>
<TABLE>
<CAPTION>
AVERAGE CLOSING PRICE FINAL CLASS A/ FINAL CLASS B/ FINAL
OF PACIFICARE CLASS B COMMON SHARE COMMON SHARE EXCHANGE
COMMON STOCK RATIO RATIO RATIO
--------------------- ------------------- ------------------- -----------
<S> <C> <C> <C> <C>
$88.40 or above .040 .189 .229
$80.00 .040 .205 .245
$62.90 to $73.10 .040 .218 .258
$55.00 .040 .233 .273
$47.60 or less .040 .247 .287
</TABLE>
<TABLE>
<S> <C>
In the event that the Series A Amendment is not approved
and an Irrevocable Election is made, the final ratios
will be between those set forth in the above tables.
See "The Mergers and Related Transactions -- Merger
Consideration," "Description of PacifiCare Holding
Capital Stock" and "The Mergers and Related Transactions
-- Talbert Rights Offering."
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Effect on Holders of FHP Preferred
Stock........................... At the Effective Time, each share of FHP Preferred
Stock, assuming approval of the Series A Amendment or
the making of an Irrevocable Election as to such share,
will be converted into the right to receive: $14.113 in
cash, 0.50 shares of PacifiCare Holding Preferred, and
Talbert Rights. The new PacifiCare Holding Series A
Preferred is generally similar to the FHP Preferred
Stock except that it pays an annual dividend of $1.00
per share rather than $1.25 per share and is convertible
into PacifiCare Holding Class B Common. If the Series A
Amendment is not approved and an Irrevocable Election as
to such share has not been made, at the Effective Time,
each share of FHP Preferred Stock will be treated in
accordance with the FHP Certificate. Each holder (other
than a holder who has made an Irrevocable Election) will
be given the opportunity to exercise certain special
conversion rights and thereupon receive $25.00 in cash
or a mix of cash and PacifiCare Holding Common. If these
rights are not exercised, the holders (other than
holders who have made Irrevocable Elections) will
receive the same consideration as if they had converted
the FHP Preferred Stock into FHP Common Stock
immediately prior to the Effective Time. See "The
Mergers and Related Transactions -- Merger
Consideration," "Description of PacifiCare Holding
Capital Stock" and "The Mergers and Related Transactions
-- Talbert Rights Offering."
Effect on Holders of PacifiCare
Common Stock.................... At the Effective Time, each share of PacifiCare Class A
Common Stock then outstanding will be converted into the
right to receive one share of PacifiCare Holding Class A
Common and each share of PacifiCare Class B Common Stock
will be converted into the right to receive one share of
PacifiCare Holding Class B Common. Prior to the
Effective Time, there has been no public market for
PacifiCare Holding Common. See "Description of
PacifiCare Holding Capital Stock."
Talbert; Talbert Rights
Offering........................ By virtue of the FHP Merger, at the Effective Time, the
shares of FHP Capital Stock will be converted in part
into rights to purchase, in the aggregate, an
approximately 92% ownership interest in Talbert for an
aggregate price of approximately $60 million. Talbert,
through TMMC and THSC, organizes and manages physician
and dentist practice groups that contract with HMOs and
other payors to provide health care services to their
members. As of September 30, 1996, Talbert had
approximately 360 affiliated physicians and 80 dentists
providing comprehensive care in 54 medical centers in
Southern California, Utah, Arizona, New Mexico and
Nevada. See "The Mergers and Related Transactions --
Talbert Rights Offering."
Effect on Holders of Stock
Options......................... See "The Mergers and Related Transactions -- Stock
Options; Benefit Plans."
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Amendment to the PacifiCare
Certificate of Incorporation.... In order to permit the PacifiCare Merger to occur, the
stockholders of PacifiCare are being asked to amend the
PacifiCare Certificate. The PacifiCare Certificate
currently requires that holders of PacifiCare Class B
Common Stock receive in a merger the same consideration
per share as holders of PacifiCare Class A Common Stock.
PacifiCare stockholders are being asked to approve an
amendment to the PacifiCare Certificate to permit
holders of PacifiCare Class B Common Stock to receive
PacifiCare Holding Class B Common while holders of
PacifiCare Class A Common Stock receive PacifiCare
Holding Class A Common. See "Amendment of the
Certificate of Incorporation of PacifiCare."
Financing of Merger
Consideration................... It is currently anticipated that all of the
approximately $1.0 billion of cash required to pay the
Cash Consideration for the FHP Merger and the fees and
expenses of the Mergers will be funded out of a credit
facility of PacifiCare Holding. PacifiCare Holding has
entered into the Credit Agreement, with Bank of America,
as agent, providing, on the terms and subject to the
conditions set forth therein, for a five-year,
unsecured, reducing revolving credit facility of $1.5
billion. See "The Mergers and Related Transactions --
Financing of FHP Merger Consideration."
Regulatory Matters................ The consummation of the Mergers is subject to certain
filings and approvals with federal and state agencies
regulating HMOs and insurance companies. Applications
for such approvals have been filed and such approvals
are currently expected to be obtained prior to the end
of 1996. There can be no assurance, however, when or
whether such approvals will be received, or what actions
PacifiCare Holding will be required to take or what
terms and conditions will be imposed on PacifiCare
Holding to obtain such approvals. PacifiCare and FHP
have each received a Second Request from the FTC under
the HSR Act, which has the effect of delaying
consummation of the Mergers until 20 days after
PacifiCare and FHP each substantially comply with the
Second Request, unless the FTC grants early termination
of the HSR Act waiting period. There can be no assurance
that a challenge to the Mergers on antitrust grounds
will not be made, or, if such a challenge is made,
PacifiCare or FHP would prevail or would not be required
to divest certain assets or to accept certain conditions
in order to consummate the Mergers. See "The Mergers and
Related Transactions -- Regulatory Matters."
Conditions to the Mergers;
Termination; Termination Fees... The obligations of PacifiCare and FHP to consummate the
Mergers are subject to various conditions, including
obtaining required stockholder and regulatory approvals,
the absence of any orders or other legal restraint or
prohibition preventing Closing, the absence of certain
litigation, the absence of a material adverse change in
either FHP or
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
PacifiCare since the Original Reorganization Agreement
was signed, the accuracy of representations and
warranties, the compliance by both parties with the
covenants contained in the Reorganization Agreement and
the receipt of certain legal opinions and other
certifications. See "The Reorganization Agreement --
Conditions to the Mergers." The Reorganization Agreement
may be terminated and the Mergers abandoned prior to the
Effective Time by mutual consent of PacifiCare and FHP;
by either PacifiCare or FHP if the Mergers are not
consummated prior to April 30, 1997, or for certain
other reasons. See "The Reorganization Agreement --
Termination." If the Reorganization Agreement is
terminated under certain circumstances, FHP will pay
PacifiCare $50 million. If the Reorganization Agreement
is terminated under certain other circumstances,
PacifiCare will pay FHP $50 million. If the Mergers are
not consummated solely by reason of a breach by
PacifiCare caused by the termination of the agreements
related to the financing of the Mergers or if PacifiCare
is otherwise unable to procure such financing, then
PacifiCare will pay FHP $100 million as liquidated
damages. See "The Reorganization Agreement -- Expenses
and Termination Fees."
Board of Directors after the
Mergers......................... The PacifiCare Holding Board of Directors after the
Mergers will consist of the existing PacifiCare Board of
Directors, Jack R. Anderson and Joseph F. Prevratil,
current directors of FHP designated by the FHP Board of
Directors, and Craig T. Beam and Bradley C. Call,
designated by the PacifiCare Board of Directors.
Interests of Certain Persons in
the Mergers..................... FHP has entered into substantially identical employment
agreements dated various dates with certain of its
executive officers. Upon a "Change of Control" (as
defined in the employment agreements), the employment
agreements provide that FHP will continue to employ such
executives for a period of three years commencing on the
"Effective Date" of the "Change of Control." Each
agreement contains provisions concerning the level of
such executive's responsibilities and salary during the
three-year term. Each agreement also contains
termination provisions under various circumstances. If
FHP terminates such executive's employment other than
for cause, death or disability during the three-year
term, FHP will be required to pay salary and other
benefits for the remaining portion of such executive
officer's employment term and such executive's stock
options will vest under certain circumstances. See "The
Mergers and Related Transactions -- Interests of Certain
Persons in the Mergers -- Officers and Directors of
FHP." Pursuant to the provisions of PacifiCare's stock
option plans, upon the consummation of the Mergers, all
unvested options held for at least six months issued
under the PacifiCare Directors Stock Option Plan will
vest in full and all other unvested
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
options held for at least six months by directors,
officers, employees and consultants will be eligible to
vest in full; provided, however, that PacifiCare will
seek waivers of this acceleration provision from certain
of its executive officers in exchange for the grant of
additional options. See "The Mergers and Related
Transactions -- Interests of Certain Persons in the
Mergers -- Options Held by Directors and Officers of
PacifiCare."
Appraisal Rights.................. Pursuant to the DGCL, holders of shares of FHP Capital
Stock may exercise appraisal rights in connection with
the FHP Merger in accordance with and subject to the
provisions of the DGCL. Holders of PacifiCare Common
Stock will not have appraisal rights in connection with
the Mergers. See "The Mergers and Related Transactions
-- Appraisal Rights," and Appendix D.
Nasdaq Listing.................... It is intended that the PacifiCare Holding Class A
Common, Class B Common and Preferred to be issued in the
Mergers will be listed on the Nasdaq National Market.
See "The Mergers and Related Transactions -- Nasdaq
National Market." Prior to the Effective Time, there has
been no public market for any of this stock.
Accounting Treatment.............. The FHP Merger will be accounted for by PacifiCare
Holding under the "purchase" method of accounting. The
PacifiCare Merger will be treated as a reorganization
with no change in the recorded amount of PacifiCare
assets and liabilities. See "The Mergers and Related
Transactions -- Accounting Treatment."
Tax Consequences.................. In general, except with respect to any Cash
Consideration and the fair market value of the Talbert
Rights to be received in the FHP Merger, the Mergers
have been structured to qualify as tax-free transactions
under the Code. The obligations of PacifiCare and FHP to
consummate the Mergers are conditioned on receipt by
PacifiCare of an opinion from Cooley Godward LLP,
counsel to PacifiCare, and by FHP of an opinion from
Sheppard, Mullin, Richter & Hampton LLP, counsel to FHP,
in each case based on certain factual representations
and assumptions set forth in such opinions, that the
Mergers so qualify. See "The Mergers and Related
Transactions -- Certain Federal Income Tax
Consequences."
PacifiCare Holding Capital
Stock........................... PacifiCare Holding will issue in the Mergers PacifiCare
Holding Class A Common, PacifiCare Holding Class B
Common, and if the Series A Amendment is approved or if
any Irrevocable Election is made, PacifiCare Holding
Preferred. The PacifiCare Holding Class A Common and
PacifiCare Holding Class B Common are substantially
identical to the PacifiCare Class A Common Stock and
PacifiCare Class B Common Stock. The PacifiCare Holding
Preferred is similar to the FHP Preferred Stock, except
that it has an annual dividend of $1.00 per share rather
than $1.25 per share and is convertible into PacifiCare
Holding Class B Common at a conversion rate based upon
the Final Exchange Ratio. See "Description of PacifiCare
Holding Capital Stock."
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
RISK FACTORS
Risk Factors...................... See "Risk Factors" and "The Merger and Related
Transactions -- Regulatory Matters."
</TABLE>
MARKET PRICES
PacifiCare Common Stock is listed on the Nasdaq National Market under the
symbols "PHSYA" and "PHSYB." FHP Capital Stock is also listed on the Nasdaq
National Market under the symbols "FHPC" and "FHPCA." There is no public market
for any PacifiCare Holding Capital Stock. The following table sets forth the
high and low closing prices per share of PacifiCare Class A Common Stock,
PacifiCare Class B Common Stock, FHP Common Stock and FHP Preferred Stock as
reported by Nasdaq for the periods indicated. FHP's fiscal year end is June 30th
and PacifiCare's fiscal year end is September 30th.
<TABLE>
<CAPTION>
PACIFICARE CLASS A PACIFICARE CLASS B
FHP COMMON STOCK FHP
PREFERRED
COMMON STOCK COMMON STOCK STOCK
-------------------- -------------------- -------------------- ---------
HIGH LOW HIGH LOW HIGH LOW HIGH
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CALENDAR YEAR ENDED DECEMBER 31, 1994
Quarter ended March 31st..................... $ 57 $ 38 1/4 $ 56 3/8 $ 37 3/4 $ 29 $ 24 $ --
Quarter ended June 30th...................... 59 3/4 47 1/2 59 1/2 47 1/2 25 1/4 20 3/4 24 1/2
Quarter ended September 30th................. 79 3/16 47 75 46 30 1/2 21 3/4 28 1/4
Quarter ended December 31st.................. 79 60 3/4 74 3/4 60 1/2 29 25 1/4 27 1/4
CALENDAR YEAR ENDED DECEMBER 31, 1995
Quarter ended March 31st..................... 76 1/4 61 77 62 29 1/2 24 1/4 27 1/2
Quarter ended June 30th...................... 75 1/8 44 1/2 76 1/4 44 29 1/2 19 3/4 27 1/2
Quarter ended September 30th................. 68 1/2 49 3/4 71 48 1/2 26 5/8 22 1/2 26
Quarter ended December 31st.................. 89 3/8 64 1/2 91 66 1/4 29 23 1/8 26 7/8
CALENDAR YEAR ENDED DECEMBER 31, 1996
Quarter ended March 31st..................... 98 3/4 75 1/4 99 1/2 78 1/2 33 1/2 27 3/8 29 5/8
Quarter ended June 30th...................... 83 3/4 63 7/8 86 3/4 65 1/4 31 3/4 26 5/8 28 3/8
Quarter ended September 30th................. 84 3/4 59 5/8 91 59 3/4 37 5/8 22 31 1/4
Quarter ended December 31st
(through November 20, 1996)................ 82 5/8 64 1/8 85 1/4 68 3/4 37 33 3/4 30 7/8
<CAPTION>
LOW
---------
<S> <C>
CALENDAR YEAR ENDED DECEMBER 31, 1994
Quarter ended March 31st..................... $ --
Quarter ended June 30th...................... 23 1/4
Quarter ended September 30th................. 22 3/8
Quarter ended December 31st.................. 24 3/8
CALENDAR YEAR ENDED DECEMBER 31, 1995
Quarter ended March 31st..................... 23 3/8
Quarter ended June 30th...................... 21 3/8
Quarter ended September 30th................. 22 7/8
Quarter ended December 31st.................. 23 1/4
CALENDAR YEAR ENDED DECEMBER 31, 1996
Quarter ended March 31st..................... 26
Quarter ended June 30th...................... 25 1/8
Quarter ended September 30th................. 21 7/8
Quarter ended December 31st
(through November 20, 1996)................ 28 1/4
</TABLE>
On August 2, 1996, the last trading day before public announcement of the
execution of the Original Reorganization Agreement, the closing price of
PacifiCare Class A Common Stock, PacifiCare Class B Common Stock, FHP Common
Stock and FHP Preferred Stock as reported by Nasdaq were $68 3/4 per share,
$67 3/4 per share, $27 7/8 per share and $25 3/8 per share, respectively.
On November 20, 1996, the last trading day before the date of this Joint
Proxy Statement/ Prospectus, the closing price of PacifiCare Class A Common
Stock, PacifiCare Class B Common Stock, FHP Common Stock and FHP Preferred Stock
as reported by Nasdaq were $77 1/4 per share, $80 3/8 per share, $35 1/2 per
share, and $29 3/8 per share, respectively.
PACIFICARE AND FHP STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET
QUOTATIONS FOR THE PACIFICARE CLASS A COMMON STOCK, PACIFICARE CLASS B COMMON
STOCK, FHP COMMON STOCK AND FHP PREFERRED STOCK.
11
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
PACIFICARE SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following data for each of the five fiscal years in the period ended
September 30, 1995 are derived from the audited consolidated financial
statements of PacifiCare. The following selected historical financial data for
the nine months ended June 30, 1995 and 1996 are derived from the unaudited
consolidated financial statements of PacifiCare. The following summary financial
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," found in the consolidated
financial statements and related notes and other financial information contained
in PacifiCare's Forms 10-K and 10-K/A for the fiscal year ended September 30,
1995 and Forms 10-Q and 10-Q/ A for the quarterly period ended June 30, 1996,
which are incorporated herein by reference. See "Incorporation of Certain
Documents by Reference" and "Available Information."
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE
FISCAL YEARS ENDED SEPTEMBER 30, 30,
---------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 (1) 1995 (1) 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA: (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
Total operating revenue................ $1,242,357 $1,686,314 $2,221,073 $2,893,252 $3,731,022 $2,715,616 $3,416,212
Expenses:
Health care services................. 1,053,239 1,393,645 1,850,469 2,374,258 3,077,135 2,238,504 2,855,936
Marketing, general and administrative
expenses............................ 158,985 229,881 279,865 394,620 498,445 364,349 425,147
Amortization of intangibles.......... 399 2,239 3,495 3,444 7,199 4,863 6,904
Disposition and restructuring charges
(2)................................. -- -- -- -- -- -- 17,147
OPM reserve charge (3)............... -- -- -- -- -- -- 25,000
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income....................... 29,734 60,549 87,244 120,930 148,243 107,900 86,078
Interest income........................ 14,960 17,725 23,459 28,588 39,406 27,815 34,749
Interest expense....................... (173) (3,422) (2,376) (4,050) (5,549) (4,723) (1,737)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes and
cumulative effect of a change in
accounting principle.................. 44,521 74,852 108,327 145,468 182,100 130,992 119,090
Provision for income taxes............. 18,819 31,262 45,631 60,875 74,005 53,328 50,664
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before cumulative effect of a
change in accounting principle........ 25,702 43,590 62,696 84,593 108,095 77,664 68,426
Cumulative effect on prior years of a
change in accounting principle (4).... -- -- -- 5,658 -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income............................. $ 25,702 $ 43,590 $ 62,696 $ 90,251 $ 108,095 $ 77,664 $ 68,426
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings per share:
Before cumulative effect of a change
in accounting principle............. $ 1.10 $ 1.78 $ 2.25 $ 3.02 $ 3.62 $ 2.64 $ 2.16
Cumulative effect on prior years of a
change in accounting principle...... -- -- -- 0.20 -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings per share..................... $ 1.10 $ 1.78 $ 2.25 $ 3.22 $ 3.62 $ 2.64 $ 2.16
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Weighted average number of shares of
common stock and equivalents
outstanding........................... 23,346 24,509 27,847 28,004 29,864 29,378 31,654
OPERATING DATA:
Medical loss ratio (5):
Commercial........................... 84.0% 80.2% 82.5% 80.5% 82.5% 82.2% 83.5%
Medicare............................. 87.1% 86.6% 85.6% 85.2% 84.3% 84.6% 85.1%
Operating income margin (6)............ 2.4% 3.6% 3.9% 4.2% 4.0% 4.0% 3.8%
Period-end HMO membership:
Commercial........................... 567 742 807 949 1,216 1,176 1,407
Medicare (7)......................... 159 214 290 409 541 506 589
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total............................ 726 956 1,097 1,358 1,757 1,682 1,996
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
------------------------------------------------------- ----------
1991 1992 1993 1994 1995 1996
--------- --------- --------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................ $ 21,837 $ 49,550 $ 162,781 $ 231,242 $ 320,615 $ 403,485
Goodwill and intangible assets............. $ 8,625 $ 83,004 $ 79,591 $ 167,085 $ 295,794 $ 289,189
Total assets............................... $ 322,328 $ 498,082 $ 693,646 $1,105,548 $1,385,372 $1,264,657
Long-term debt due after one year.......... $ 2,280 $ 18,488 $ 21,821 $ 101,137 $ 11,949 $ 5,555
Shareholders' equity....................... $ 99,678 $ 198,884 $ 319,294 $ 413,358 $ 732,024 $ 812,698
</TABLE>
- ------------------------------
(1) Operating results of the 1995 Acquisitions are included in the historical
operating results of PacifiCare from the date of acquisition. See "Unaudited
Pro Forma Financial Information."
(2) Disposition and restructuring charges include (i) a $9.3 million loss ($0.26
per share, net of tax) associated with the disposition of Pasteur Delivery
Systems, the Staff Model HMO subsidiary located in Florida, and (ii) a
restructuring charge of $7.8 million ($0.15 per share, net of tax)
associated with the discontinuation of certain specialty health care
products and services and the restructuring of regional operations.
(3) The OPM reserve charge consisted of a $25 million ($0.47 per share, net of
tax) increase in reserves for potential claims in connection with OPM
contracts to provide managed health care services to Federal employees and
their dependents.
(4) PacifiCare adopted the liability method of accounting for income taxes in
its financial statements for the fiscal year ended September 30, 1994. The
cumulative effect of adopting the liability method for periods prior to
October 1, 1993 resulted in a benefit of $5.7 million ($0.20 per share).
(5) Health care costs as a percentage of premium revenue. Medicare medical loss
ratios include Medicaid premiums and health care costs, which were
immaterial to the resulting ratios.
(6) Operating income before disposition, restructuring and OPM reserve charges
as a percentage of total operating revenue.
(7) Includes Medicaid membership, which as of September 30, 1994 and 1995 was 22
and 60, respectively, and as of June 30, 1996 was 52.
RECENT DEVELOPMENTS
PacifiCare has announced its results for the fourth quarter and fiscal year
ended September 30, 1996. Operating revenue for the quarter and the year were
$1.2 billion and $4.6 billion, respectively, compared with $1.0 billion and $3.7
billion for the fourth quarter and fiscal year ended September 30, 1995. Net
income for the quarter and the year was $4 million and $72 million,
respectively, or $0.11 and $2.27 per share. The fourth quarter results included
an approximately $59 million charge for the impairment of goodwill ($1.08 per
share, net of tax) related to PacifiCare's decision not to launch its Secure
Horizons-Registered Trademark- programs in Florida and to explore options for
its Florida operations, including a potential sale. On a comparable basis, net
income for the fourth quarter ended September 30, 1996 before the impairment
charge (net of related tax benefits) was $38 million or $1.19 per share compared
with $30 million or $0.98 per share during the quarter ended September 30, 1995.
On a comparable basis, net income for the fiscal year ended September 30, 1996
before impairment, disposition and restructuring charges and the OPM reserve
charge (net of related tax benefits) was $134 million or $4.23 per share
compared with $108 million or $3.62 per share for the fiscal year ended
September 30, 1995.
13
<PAGE>
FHP SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following data for each of the five fiscal years in the period ended
June 30, 1996 are derived from the audited consolidated financial statements of
FHP. The following selected historical financial data for the three months ended
September 30, 1995 and 1996 are derived from the unaudited consolidated
financial statements of FHP. The following summary financial data should be read
in conjunction with the consolidated financial statements and related notes of
FHP contained herein and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," contained in FHP's Form 10-K for the
fiscal year ended June 30, 1996 and Form 10-Q for the quarterly period ended
September 30, 1996, which are incorporated herein by reference. See
"Incorporation of Certain Documents by Reference," "Available Information" and
"FHP International Corporation Consolidated Financial Statements."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED JUNE 30, SEPTEMBER 30,
---------------------------------------------------------- -------------------------
1992 1993 1994 (1) 1995 1996 1995 1996
---------- ---------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA: (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
Revenue............................. $1,586,086 $2,005,854 $2,472,958 $3,909,380 $4,179,284 $ 1,004,633 $1,098,699
Expenses:
Health care services.............. 1,324,700 1,681,144 2,057,689 3,238,489 3,530,928 849,816 929,695
Marketing, general and
administrative expenses.......... 231,916 269,645 332,249 490,196 479,480 117,037 124,644
Amortization of intangibles....... -- -- -- 31,506 31,133 8,089 7,366
Restructuring charges (2)......... -- -- -- 75,110 9,659 5,759 --
OPM reserve charge (3)............ -- -- -- -- 45,000 -- --
---------- ---------- ---------- ---------- ---------- ------------- ----------
Operating income.................... 29,470 55,065 83,020 74,079 83,084 23,932 36,994
Interest income..................... 22,211 14,919 20,365 32,079 36,174 9,136 9,099
Interest expense.................... (189) (211) (6,565) (25,972) (21,141) (6,424) (2,493)
---------- ---------- ---------- ---------- ---------- ------------- ----------
Income before income taxes.......... 51,492 69,773 96,820 80,186 98,117 26,644 43,600
Provision for income taxes.......... 18,602 25,607 37,510 42,894 53,964 12,717 20,056
---------- ---------- ---------- ---------- ---------- ------------- ----------
Net income.......................... 32,890 44,166 59,310 37,292 44,153 13,927 23,544
Preferred stock dividends........... 1,032 25,337 26,425 6,607 6,575
---------- ---------- ---------- ---------- ---------- ------------- ----------
Net income attributable to
common stock....................... $ 32,890 $ 44,166 $ 58,278 $ 11,955 $ 17,728 $ 7,320 $ 16,969
---------- ---------- ---------- ---------- ---------- ------------- ----------
---------- ---------- ---------- ---------- ---------- ------------- ----------
Earnings per share.................. $ 1.00 $ 1.33 $ 1.71 $ 0.29 $ 0.43 $ 0.18 $ 0.40
---------- ---------- ---------- ---------- ---------- ------------- ----------
---------- ---------- ---------- ---------- ---------- ------------- ----------
Weighted average number of shares of
common stock and equivalents
outstanding........................ 32,921 33,270 34,051 41,057 41,524 41,016 42,059
---------- ---------- ---------- ---------- ---------- ------------- ----------
---------- ---------- ---------- ---------- ---------- ------------- ----------
Fully diluted earnings per share
(4)................................ $ 1.00 $ 1.31 $ 1.71 $ -- $ -- $ -- $ 0.40
---------- ---------- ---------- ---------- ---------- ------------- ----------
---------- ---------- ---------- ---------- ---------- ------------- ----------
Fully diluted weighted average
number
of shares (4)...................... 32,945 33,587 34,717 -- -- -- 59,300
---------- ---------- ---------- ---------- ---------- ------------- ----------
---------- ---------- ---------- ---------- ---------- ------------- ----------
OPERATING DATA:
Medical loss ratio (5).............. 83.5% 83.8% 83.2% 82.8% 84.5% 84.6% 84.6%
Adjusted operating income margin
(6)................................ 1.9% 2.8% 3.4% 3.8% 3.3% 3.0% 3.4%
Period-end HMO membership:
Commercial........................ 468 540 1,364 1,404 1,516 1,417 1,526
Medicare.......................... 248 298 348 375 397 383 406
---------- ---------- ---------- ---------- ---------- ------------- ----------
Total........................... 716 838 1,712 1,779 1,913 1,800 1,932
---------- ---------- ---------- ---------- ---------- ------------- ----------
---------- ---------- ---------- ---------- ---------- ------------- ----------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
---------------------------------------------------------- -------------
1992 1993 1994 1995 1996 1996
---------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA: (IN THOUSANDS)
Working capital........................... $ 54,141 $ (29,034) $ (141,860) $ (78,379) $ (60,167) $ (38,766)
Goodwill and other intangibles, net....... -- 2,848 1,082,701 1,059,507 1,028,374 1,021,008
Total assets.............................. $ 615,659 $ 745,684 $2,169,269 $2,315,816 $2,013,879 $ 2,044,218
Long-term debt due after one year......... $ 23,279 $ 20,802 $ 377,986 $ 337,817 $ 104,184 $ 100,222
Shareholders' equity...................... $ 311,381 $ 364,422 $1,113,136 $1,140,141 $1,167,629 $ 1,191,701
</TABLE>
- ------------------------------
(1) Operating results of TakeCare, Inc. acquisition are included in the
historical operating results of FHP from the date of acquisition.
(2) Restructuring charges of $75.1 million ($1.13 per share, net of tax) for the
fiscal year ended June 30, 1995 related to the Restructuring Plan, which
involved (i) the discontinuance of certain services and programs, (ii) a
reduction in work force, and (iii) the write-down of certain owned and
operated hospitals. Restructuring charge of $9.7 million ($0.15 per share,
net of tax) for the fiscal year ended June 30, 1996 involves additional
charges relating to implementing the Restructuring Plan and disposal of
certain owned and operated hospitals.
(3) The OPM reserve charge consisted of a $45.0 million ($0.68 per share, net of
tax) increase in reserves for potential claims in connection with OPM
contracts to provide managed health care services to Federal employees and
their dependents. One claim of $15 million plus interest was settled in the
first quarter of fiscal year 1997 for $12 million.
(4) Fully diluted earnings per share are not presented for the fiscal years
ended June 30, 1995 and 1996 and the three months ended September 30, 1995
because they are antidilutive.
(5) Health care costs as a percentage of premium revenue.
(6) Operating income as a percentage of revenue, before restructuring charges
and OPM reserve charge.
RECENT DEVELOPMENTS
On November 19, 1996, Memorial Health Services, a California nonprofit
benefit corporation ("Memorial"), filed a Demand for Arbitration against FHP,
Inc. with the American Arbitration Association (the "Demand"). The Demand
alleges that FHP fraudulently and/or negligently misrepresented and failed to
disclose certain information in connection with Memorial's purchase of a
hospital in Fountain Valley, California from FHP and its entry into a Capitation
Contract with FHP. Memorial alleges that it paid approximately $87 million for
the hospital and the right to exclusively serve FHP senior and commercial member
populations at such hospital and other Memorial facilities. Memorial claims that
but for FHP's alleged misrepresentations and nondisclosures, Memorial would not
have purchased the hospital nor entered into the Capitation Contract without a
material decrease in purchase price and an increase in the Capitation Fee for
each FHP member served. Memorial's claims for relief include claims for
compensatory damages in excess of $275 million, punitive damages in an amount to
be determined, and rescission of the hospital purchase contract and Capitation
Contract (together with compensatory and punitive damages up to the date of
rescission), plus, in each case, attorneys fees and costs incurred in
arbitration. FHP disputes the arbitrability of Memorial's claims and believes
that Memorial's claims are without merit. FHP intends to vigorously defend
against such claims. Management believes that resolution of the Demand will not
have a material adverse effect on the consolidated financial position or results
of operations or cash flows of FHP.
15
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION
The Summary Unaudited Pro Forma Financial Information set forth below has
been derived from the Unaudited Pro Forma Financial Information included
elsewhere in this Joint Proxy Statement/ Prospectus. The Summary Unaudited Pro
Forma Financial Information reflects the combined effect of the Mergers and the
1995 Acquisitions as if such transactions had occurred at the beginning of each
period presented for purposes of the pro forma income statement data and on June
30, 1996 for purposes of the pro forma balance sheet data. The Summary Unaudited
Pro Forma Financial Information does not include the pro forma effect of the
Talbert Rights Offering. See "Unaudited Pro Forma Financial Information."
The Summary Unaudited Pro Forma Financial Information set forth below and
the Unaudited Pro Forma Financial Information included elsewhere herein do not
purport to present the combined financial position or results of operations of
PacifiCare and FHP had the Acquisitions assumed therein occurred on the dates
specified, nor are they necessarily indicative of the results of operations that
may be expected in the future. The Summary Unaudited Pro Forma Financial
Information set forth below is qualified in its entirety by reference to, and
should be read in conjunction with, the Unaudited Pro Forma Financial
Information included elsewhere in this Joint Proxy Statement/Prospectus.
PacifiCare currently reports its financial information on the basis of a
September 30 fiscal year. FHP currently reports its financial information on the
basis of a June 30 fiscal year. The Unaudited Pro Forma Condensed Consolidated
Statement of Income for the fiscal year ended September 30, 1995 includes
PacifiCare's historical results of operations for the fiscal year ended
September 30, 1995 and FHP's historical results of operations for the fiscal
year ended June 30, 1995. The Unaudited Pro Forma Condensed Consolidated
Statement of Income for the nine months ended June 30, 1996 includes the
historical results of operations of both PacifiCare and FHP for the nine months
ended June 30, 1996. The Unaudited Pro Forma Balance Sheet includes the
historical balance sheets of both PacifiCare and FHP as of June 30, 1996.
The Summary Unaudited Pro Forma Financial Information should be read in
conjunction with: (i) such historical financial statements, and the notes
thereto, which are included in or incorporated by reference in this Joint Proxy
Statement/Prospectus; (ii) the selected historical financial data appearing
elsewhere in this Joint Proxy Statement/Prospectus; and (iii) the unaudited pro
forma financial information and comparative per share data, including the notes
thereto, appearing elsewhere in this Joint Proxy Statement/Prospectus. See
"Incorporation of Certain Documents by Reference," "Available Information," "--
PacifiCare Selected Historical Financial and Operating Data," "-- FHP Selected
Historical Financial and Operating Data," "Unaudited Pro Forma Financial
Information," "-- Comparative Per Share Data," and "FHP International
Corporation Consolidated Financial Statements."
The Summary Unaudited Pro Forma Financial Information set forth below and
the Unaudited Pro Forma Financial Information included elsewhere herein assumed
that the FHP Merger will be accounted for under the purchase method of
accounting. The stock consideration portion of the purchase price assumed a
market price for PacifiCare Class A Common Stock of $71.00 and an Average
Closing Price of PacifiCare Class B Common Stock of $74.00. The Reorganization
Agreement provides for an adjustment to the number of shares to be issued to the
stockholders of FHP if the Average Closing Price of PacifiCare Class B Common
Stock is less than $62.90 or greater than $73.10. The increases in the market
price for PacifiCare Class A Common Stock and the Average Closing Price of
PacifiCare Class B Common Stock (from assumed values of $67.00 and $68.00,
respectively) resulted in: (i) the issuance of 479,000 fewer shares of
PacifiCare Holding Class B Common Stock; (ii) additional pro forma purchase
price consideration of $38.6 million; and (iii) had the effect of reducing pro
forma earnings per share by $0.01 for the nine months ended June 30, 1996 and
had no effect on pro forma earnings per share for the fiscal year ended
September 30, 1995. The Final Class A/ Common Share Ratio and Final Class
B/Common Share Ratio and the conversion ratio with respect to the PacifiCare
Holding Preferred will be based upon the Average Closing Price of the PacifiCare
Class B Common Stock calculated at the Effective Time. The purchase price used
to calculate goodwill will be based on the trading prices of PacifiCare Holding
Class A Common and PacifiCare Holding Class B Common following the Effective
Time.
16
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED ENDED JUNE
SEPTEMBER 30, 1995 30, 1996
------------------ -------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
INCOME STATEMENT DATA:
Total operating revenue................................................... $ 7,711,064 $ 6,590,863
Expenses:
Health care services.................................................... 6,373,908 5,537,048
Marketing, general and administrative expenses.......................... 999,547 786,724
Amortization of intangibles............................................. 70,338 52,911
Disposition and restructuring charges (1)............................... 75,110 21,047
OPM reserve charge (2).................................................. -- 70,000
------------------ -------------
Operating income.......................................................... 192,161 123,133
Interest income........................................................... 67,916 61,787
Interest expense.......................................................... (110,075) (75,194)
------------------ -------------
Income before income taxes................................................ 150,002 109,726
Provision for income taxes................................................ 78,550 64,263
------------------ -------------
Net income................................................................ 71,452 45,463
Preferred stock dividends................................................. 10,518 7,889
------------------ -------------
Net income attributable to common stock................................... $ 60,934 $ 37,574
------------------ -------------
------------------ -------------
Weighted average common shares and equivalents outstanding used to
calculate earnings per share (3)......................................... 40,955 42,745
------------------ -------------
------------------ -------------
Earnings per share attributable to common stock........................... $ 1.49 $ 0.88
------------------ -------------
------------------ -------------
Ratio of earnings to fixed charges (4).................................... 2.2x 2.2x
------------------ -------------
------------------ -------------
Ratio of earnings to fixed charges and preferred stock dividends (5)...... 1.9x 1.8x
------------------ -------------
------------------ -------------
<CAPTION>
JUNE 30, 1996
-------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents.......................................................................... $ 321,334
Working capital............................................................................... 238,018
Goodwill and intangible assets................................................................ 2,528,838
Total assets.................................................................................. 4,469,811
Long-term debt due after one year............................................................. 1,123,866
Shareholders' equity.......................................................................... 1,923,065
</TABLE>
- ------------------------------
(1) Disposition and restructuring charges include (i) a $9.3 million loss ($0.19
per share, net of tax) associated with the disposition of Pasteur Delivery
Systems, the Staff Model HMO subsidiary located in Florida for the nine
months ended June 30, 1996, and (ii) a restructuring charge of $75.1 million
($1.10 per share, net of tax) and $11.7 million ($0.16 per share, net of
tax) associated with the discontinuation of certain specialty health care
products and services and related reduction in workforce and asset sales and
write-offs for the fiscal year ended September 30, 1995 and the nine months
ended June 30, 1996, respectively.
(2) The OPM reserve charge consisted of a $70.0 million ($0.98 per share, net of
tax) increase in reserves for potential claims in connection with OPM
contracts to provide managed health care services to Federal employees and
their dependents.
(3) See "Unaudited Pro Forma Financial Information" for calculation of weighted
average common shares and equivalents outstanding.
(4) For purposes of computing the ratio of earnings to fixed charges, earnings
include income before fixed charges, provision for Federal and state income
taxes and minority interests. Fixed charges consist of interest expense,
including amortization of deferred financing costs and the interest
component of capitalized leases, and the portion of operating lease expense
which management believes is representative of the interest component of
rental expense.
(5) For purposes of computing the ratio of earnings to fixed charges and
preferred stock dividends, earnings include income before fixed charges,
provision for Federal and state income taxes and minority interests. Fixed
charges and preferred stock dividends consist of preferred stock dividends,
interest expense, including amortization of deferred financing costs and the
interest component of capitalized leases, and the portion of operating lease
expense which management believes is representative of the interest
component of rental expense.
17
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth for PacifiCare and FHP certain historical and
pro forma equivalent per share data for the fiscal year ended September 30, 1995
and at September 30, 1995 and for the nine months ended June 30, 1996 and at
June 30, 1996. The exchange ratios used to calculate the purchase price assume
that (i) each outstanding share of FHP Common Stock will be converted into the
right to receive $17.50 in cash and a mix of PacifiCare Holding Class A Common
and PacifiCare Holding Class B Common at a Final Exchange Ratio of 0.256, and
(ii) each outstanding share of FHP Preferred Stock will be converted into the
right to receive $14.113 in cash and 0.50 shares of PacifiCare Holding
Preferred, assuming approval of the Series A Amendment. The actual number of
shares of PacifiCare Holding Class A Common, PacifiCare Holding Class B Common
and PacifiCare Holding Preferred to be exchanged for all of the outstanding
PacifiCare Common Stock and FHP Capital Stock will be determined at the
Effective Time based on the approval or disapproval of the Series A Amendment by
the holders of FHP Preferred Stock, the number of shares of FHP Preferred Stock
as to which Irrevocable Elections, if any, are made if the Series A Amendment is
not approved and the formulas described in detail in "The Merger and Related
Transactions -- Merger Consideration." The following data should be read in
conjunction with the Summary Unaudited Pro Forma Financial Information and the
PacifiCare and FHP Selected Historical Financial and Operating Data, including
the notes thereto, included elsewhere herein. The unaudited pro forma combined
per share data are not necessarily indicative of the operating results that
would have been achieved had the Mergers been consummated as of the beginning of
each period presented and should not be construed as representative of future
earnings.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1995 JUNE 30, 1996
------------------ -------------------
<S> <C> <C>
PACIFICARE -- HISTORICAL:
Net income per share.................................................... $ 3.62 $ 2.16
Cash dividends per share................................................ -- --
Book value per share (1)................................................ $ 23.70 $ 26.06
FHP -- HISTORICAL (2):
FHP Common Stock:
Income per common and common equivalent share......................... $ 0.29 $ 0.25
Cash dividends per share.............................................. -- --
Book value per share (1).............................................. $ 28.35 $ 28.63
FHP Preferred Stock (3):
Cash dividends per share.............................................. $ 1.25 $ 0.94
PACIFICARE HOLDING -- PRO FORMA (4):
PacifiCare Holding Common:
Income per common and common equivalent share......................... $ 1.49 $ 0.88
Cash dividends per share.............................................. -- --
Book value per share.................................................. n/a $ 45.81
PacifiCare Holding Preferred (3):
Cash dividends per share.............................................. $ 1.00 $ 0.75
</TABLE>
- ------------------------
(1) The historical book value per share is computed by dividing total
shareholders' equity by the number of shares of common stock outstanding at
the end of the period. The outstanding shares of common stock do not include
shares issuable upon exercise of options or convertible securities.
(2) The fiscal year ended September 30, 1995 includes FHP's historical results
of operations for the fiscal year ended June 30, 1995.
(3) The FHP Preferred Stock and the PacifiCare Holding Preferred each have a $25
per share liquidation preference.
(4) Adjusted to give effect to the Mergers.
18
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY
BY PACIFICARE AND FHP STOCKHOLDERS IN DETERMINING WHETHER OR NOT TO VOTE IN
FAVOR OF THE APPROVAL AND ADOPTION OF THE REORGANIZATION AGREEMENT.
RISK FACTORS RELATED TO THE BUSINESS OF PACIFICARE
GOVERNMENT CONTRACTS. PacifiCare's Secure Horizons programs provide
services to Medicare beneficiaries pursuant to contracts with HCFA. The Secure
Horizons programs are subject to regulation by HCFA and certain state agencies.
HCFA requires that HMOs be federally qualified or meet similar requirements as a
competitive medical plan in order to be eligible for Medicare risk contracts.
HCFA has the right to audit HMOs operating under Medicare risk contracts to
determine the quality of care being rendered and the degree of compliance with
HCFA's contracts and regulations. The risk contracts are subject to periodic
unilateral revisions by HCFA based on certain demographic information relating
to the Medicare population and the cost of providing health care in a particular
geographic area. PacifiCare's Medicare risk contracts are automatically renewed
every 12 months unless PacifiCare or HCFA elects either not to renew or to
terminate them. HCFA may unilaterally terminate PacifiCare's Medicare risk
contracts if PacifiCare fails to continue to meet compliance and eligibility
standards. Termination of PacifiCare's Medicare risk contracts would have a
material adverse effect on PacifiCare.
Because the use of health care services by Medicare beneficiaries generally
exceeds the use of services by those who are under the age of 65, PacifiCare's
Medicare risk contracts generate substantially larger per member revenue than
PacifiCare's non-Medicare plans. Premium revenue for each Secure Horizons member
is usually more than three times that of a commercial member, reflecting, in
part, the higher medical and administrative costs of serving a Medicare member.
As a result, although members in the Secure Horizons programs represented
approximately 30% of PacifiCare's membership at June 30, 1996, they accounted
for approximately 57% of the consolidated premium revenue for the nine months
ended June 30, 1996 and a disproportionate amount of PacifiCare's operating
profit. The Secure Horizons programs are subject to certain risks relative to
commercial programs, such as higher comparative medical costs, higher levels of
utilization, government and regulatory reporting requirements, the possibility
of reduced or insufficient government reimbursement in the future and higher
marketing and advertising costs associated with selling to individuals rather
than to groups.
As a result of HCFA's regulations governing PacifiCare's Medicare risk
programs, the "medical loss ratio" (health care expenses as a percentage of
premium revenue), as determined prospectively through formulas established by
HCFA for PacifiCare's Medicare risk contracts in a particular region, may not be
less than the medical loss ratio for PacifiCare's non-Medicare contracts in such
region. If PacifiCare were to fall out of compliance with these regulations, it
would have to provide additional benefits, reduce the supplemental premiums
charged to its Medicare members or accept a lower payment from HCFA to increase
the medical loss ratio for the Medicare risk contracts to the level of the
medical loss ratio for the non-Medicare contracts. This regulation could
materially and adversely affect PacifiCare.
Secure Horizons premiums are determined through formulas established by HCFA
for PacifiCare's Medicare risk contracts in a particular region. If these
premiums are reduced, or if premium rate increases in a particular region are
lower than the rate of increase in health care service expenses for Secure
Horizons members in such region, PacifiCare could be materially and adversely
affected. PacifiCare has attempted to mitigate this risk by paying approximately
78% of the health care service expenses for the Secure Horizons program by
utilizing Capitation Fees.
PacifiCare's Secure Horizons programs are not permitted, under federal
regulations, to account for more than one-half of PacifiCare's total HMO members
in each of PacifiCare's non-contiguous geographic state markets. This limitation
may constrain PacifiCare's rate of growth in markets where PacifiCare is able to
add Medicare members at a faster rate than commercial members.
19
<PAGE>
GOVERNMENT REGULATION AND AUDITS. PacifiCare's HMOs are licensed and
subject to state and federal statutes and regulations which extensively regulate
the activities and licensing of HMOs and subject the HMOs to periodic
examination by governmental agencies. Among the areas regulated by state and
federal law are procedures for quality assurance, resolution of grievances,
enrollment requirements, the relationship between the HMO and its health care
providers and the HMO's financial condition. To comply with such regulations, it
may be necessary for PacifiCare's HMOs to make changes from time to time in
their services, procedures, structure and marketing methods. Some of the changes
may be caused by changes in federal and state statutes and regulations that
govern PacifiCare's HMOs. Although PacifiCare intends to maintain its HMOs'
federal qualifications, state licenses and Medicare contracts, there can be no
assurance that it can do so. Additional governmental regulation or future
interpretation of existing regulations could materially and adversely affect
PacifiCare.
PacifiCare's HMOs have commercial contracts with OPM to provide managed
health care services to employees under the FEHBP. OPM, as a normal course of
business, audits health plans with which it contracts to, among other things,
verify that premiums charged under OPM contracts are established in compliance
with community rating and other requirements under the FEHBP. OPM audits for
multiple periods are in various stages of completion for several of PacifiCare's
HMO subsidiaries. PacifiCare incurred a pre-tax charge of $25 million to its
results of operations for the three and nine months ended June 30, 1996 to
increase reserves in anticipation of negotiations relating to potential
governmental claims for contracts with OPM. PacifiCare intends to negotiate with
OPM on all matters to attain a mutually satisfactory result. There can be no
assurance, however, that these negotiations will be concluded satisfactorily or
that additional, possibly material, liability will not be incurred. PacifiCare
believes that any ultimate liability in excess of amounts accrued as a result of
the audits by OPM would not materially and adversely affect PacifiCare.
In the normal course of business, the governmental agencies with which
PacifiCare contracts periodically review the premiums paid to PacifiCare under
these programs to detect whether any excess premiums have been paid. If such
agencies discover, in connection with any such review, that excess premiums were
paid to PacifiCare, adjustments to current or future premiums would be made. If
such adjustments were significant, they could materially and adversely affect
PacifiCare.
LEGISLATION. Government regulation of health care coverage products and
services is a changing area of law that varies from jurisdiction to
jurisdiction. Changes in applicable laws and regulations are continually being
considered and the interpretation of existing laws and rules may also change
from time to time. Regulatory agencies generally have broad discretion in
promulgating regulations and in interpreting and enforcing laws and rules. While
PacifiCare is unable to predict what regulatory changes may occur or the impact
on PacifiCare of any particular change, PacfiCare's operations and financial
results could be negatively affected by regulatory changes. Although PacifiCare
believes that it would benefit from legislative proposals encouraging the use of
managed health care, there can be no assurance that the enactment of any of such
reforms would not materially and adversely affect PacifiCare. The continued
consideration and enactment of "anti-managed care" laws and regulations, such as
"any willing provider" laws and limits on utilization management, by federal and
state bodies may make it more difficult for PacifiCare to control medical costs
and could adversely affect financial results.
DEPENDENCE UPON HEALTH CARE PROVIDERS. The profitability of PacifiCare and
the success of its long-range business plans depends upon its ability to attract
and retain qualified health care providers. PacifiCare's HMOs contract with
physicians, physician groups and hospitals to arrange for a comprehensive range
of health care services for their members. Contracts with health care providers
generally are negotiated on an annual basis. Generally, there is no requirement
that the provider continue its relationship with PacifiCare upon expiration of
the annual period. PacifiCare has, however, entered into a number of provider
service contracts with terms up to 10 years. PacifiCare's ability to expand is
dependent, in part, on competitive premium pricing and its ability to secure
cost effective
20
<PAGE>
contracts with additional physicians or to ensure that existing physician groups
expand their operations to accommodate PacifiCare's new HMO membership.
Achieving such objectives with respect to competitive premium pricing and
physician contracts is becoming difficult due to increasing competition. In
addition, increased competition in the health care industry has resulted in the
consolidation of health care providers, resulting in larger provider groups
being created and fewer groups with which PacifiCare can contract. Further, the
financial viability of the resulting provider groups may be adversely affected
by consolidation, rendering them unable to adequately service the membership and
meet contractual obligations. Inability to contract, loss of contracts with
providers or inability to service members could materially and adversely affect
PacifiCare.
HEALTH CARE COST CHANGES. PacifiCare's profitability is dependent, 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, levels
of utilization of health care services, new technologies, hospital costs, major
epidemics, and numerous other external influences may affect the ability of HMOs
to control health care costs.
Trends in health care prices and utilization have a substantial effect on
PacifiCare's financial results. Historically, increases in health care prices
and utilization have caused health care costs to rise faster than general
inflation. Recently, these increases have moderated, but there can be no
assurance that health care prices or utilization will not again increase at a
more rapid pace. If health care costs do begin to increase more rapidly, there
can be no assurance that PacifiCare will be able to meet its goal of maintaining
price increases at least sufficient to cover increases in health care costs.
Competitive pressures, demands from providers and customers, applicable
regulations or other factors may materially and adversely affect PacifiCare's
ability to limit the impact of health care cost increases by reducing the
amounts paid to providers or by increasing prices.
COMPETITION. The health care industry is highly competitive, both
nationally and in PacifiCare's various markets. PacifiCare has many competitors,
including indemnity insurance carriers, other HMOs, employer self-funded
programs and PPOs, many of which have substantially larger enrollments or
greater financial resources than PacifiCare. PacifiCare also faces competition
from hospitals, health care facilities and other health care providers who have
combined and formed their own networks to contract directly with employer groups
for the delivery of health care services. California, the largest market in
which PacifiCare competes, is served by a large number of HMOs and is one of the
markets most heavily penetrated by HMOs in the United States. Competition for
members in PacifiCare's markets has resulted in an increase in benefits and
price competition. In such an increasingly competitive environment, PacifiCare
believes that a comprehensive range of products and services, along with a
strong provider network, must be provided in order to remain competitive.
Increased competition could result in a decline in revenue or in price
reductions that could materially and adversely affect PacifiCare.
RISK FACTORS RELATED TO THE BUSINESS OF FHP
HEALTH CARE RISKS. FHP is generally subject to risks relating to its health
care business and operations similar to those set forth herein for PacifiCare,
and FHP's operations, profitability or business prospects could be similarly
adversely affected. See "-- Risk Factors Related to the Business of PacifiCare."
OFFICE OF PERSONNEL MANAGEMENT AUDITS. FHP's HMO subsidiaries have
contracts with OPM to provide or arrange managed health care services under
FEHBP for federal employees, annuitants and their dependents. These contracts
with OPM and applicable government regulations establish premium rating
requirements for the FEHBP. Periodically, FHP's HMO subsidiaries are subject to
audits by the government to, among other things, verify that premiums charged
under OPM contracts are established in compliance with community rating and
other requirements under the FEHBP.
In the third quarter of fiscal year 1996, FHP increased reserves by
recording a pretax charge of $45 million ($28.7 million net of tax), in
anticipation of negotiations to address existing and potential
21
<PAGE>
governmental claims arising from the OPM audits, as discussed below. FHP's
reserves reflect management's recognition that FEHBP rate audits and claims
based thereon are being handled differently by the government than in the past
and reflect the extent of business FHP's subsidiaries have conducted with OPM
over many years. Based on FHP management's understanding of the government's
current interpretation of the community rating standard requirements, FHP
management currently believes that FHP has established adequate reserves to
settle any claims that may arise from present or future FEHBP rate audits for
the years between and including 1987 through 1996, or that amounts in excess of
reserves, if any, necessary to settle any such claims would not be such as to
have a material adverse effect on the consolidated financial position or on the
results of operations or cash flows of FHP.
In the third quarter of fiscal 1996, the United States Department of Justice
notified FHP that the government believed FHP may have violated the False Claims
Act in community rate certifications that were the subject of a draft OPM audit
report covering the operations of one of FHP's HMO subsidiaries during the years
1987 through 1991, and that it believed the government's actual damages to be
approximately $15 million. In October 1996, FHP reached an agreement with the
government to resolve these claims. The agreement called for FHP to pay $12
million, which amount FHP understands will be allocated by OPM to the FEHBP
Contingency Reserve Funds for the regions covered by FHP's contracts. FHP did
not pay any fine or penalty under the agreement. Under the terms of the
agreement, the government released FHP from all claims under the subject
contracts for the years covered by the draft audit report.
OPM has opened two additional audits for years as far back as 1990 at two of
FHP's other HMO subsidiaries. In October 1996, OPM sent a draft audit report
with respect to FHP's TakeCare subsidiary, alleging certain defects in the
subsidiary's rating practices for the years 1990 through 1994, and requesting
that FHP comment on the draft findings. FHP currently is evaluating the draft
audit report and is preparing a response. It is likely that the final TakeCare
audit report will recommend that OPM seek a monetary recovery from FHP and that
such recommended recovery will be for a substantial amount. Based upon positions
taken by the government with respect to the 1987-1991 draft audit report
discussed above, FHP management believes that the other open audit and other
possible future audits may allege defective rating practices and result in
claims for adjustments from OPM. FHP management cannot determine if such claims
will result in further referrals to the Department of Justice and further False
Claims Act claims.
LITIGATION. FHP, through the operations currently comprising Talbert, has
historically directly provided medical services. During the ordinary course of
business, FHP has become a party to pending and threatened legal actions and
proceedings, a significant number of which involve claims of medical
malpractice. FHP management is of the opinion, taking into account FHP's
insurance coverage and reserves that have been established, that the outcome of
currently known legal actions and proceedings will not, singly or in the
aggregate, have a material adverse effect on the consolidated financial position
or results of operations or cash flow of FHP. However, there can be no assurance
of the foregoing or that a future claim will not exceed available insurance
coverages or reserves or that insurance policies will continue to be available
with adequate coverages at reasonable premiums. Any substantial increase in the
cost of such insurance or the unavailability of any such coverages could
materially and adversely affect FHP or PacifiCare Holding following the Mergers.
See "Summary -- Selected Historical and Pro Forma Financial and Operating Data
- -- FHP Selected Historical Financial and Operating Data -- Recent Developments."
COMMON RISK FACTORS RELATED TO THE MERGERS
INTEGRATION OF BUSINESS OPERATIONS. The Mergers and any similar
acquisitions may affect PacifiCare Holding's ability to integrate and manage its
overall business effectively. There can be no assurance that PacifiCare Holding
will be able to successfully integrate the administrative, management and
service operations of its FHP and PacifiCare subsidiaries, that such integration
will occur in a timely or efficient manner, if at all, or that the uncertainty
associated with such integration will not result in the loss of providers,
employers, members or key employees. The failure to achieve such integration in
a timely or efficient manner could materially and adversely affect PacifiCare
Holding.
22
<PAGE>
Because of the inherent uncertainties associated with combining two large
companies, there can be no assurance that the combined company will be able to
realize the synergies and cost savings that PacifiCare and FHP currently expect
to realize as a result of the Mergers. See "The Merger and Related Transactions
- -- Estimated Synergies." Furthermore, there can be no assurance that the
synergies and cost savings which are realized, if any, will not be offset by
increases in other expenses or losses.
REGULATORY APPROVAL OF THE MERGERS. The Mergers are subject to certain
filings and approvals with federal and state agencies regulating HMOs and
insurance companies. There can be no assurance that such approvals will be
granted or that the terms and conditions on which such approvals are obtained
will not materially and adversely affect the Mergers or the operations,
profitability or business prospects of the combined company following the
Mergers. Additionally, pursuant to the requirements of the HSR Act, each of
PacifiCare, FHP, PacifiCare Holding and UniHealth filed Notification and Report
Forms and certain documentary attachments with respect to their acquisitions of
voting securities in the Mergers, and PacifiCare and FHP are each in the process
of responding to a Second Request for additional information and documentary
materials issued by the FTC. A Second Request has the effect of delaying
consummation of the Mergers until 20 days after PacifiCare and FHP each
substantially comply with the Second Request, unless the FTC grants early
termination of the HSR Act waiting period. Additionally, the Attorney General of
the State of California has expressed interest in analyzing the potential
effects of the Mergers in California. PacifiCare and FHP have voluntarily agreed
to provide information to the California Attorney General under the terms of the
National Association of Attorneys General compact.
The FTC and the Antitrust Division frequently scrutinize the legality under
the antitrust laws of transactions such as the Mergers. At any time before or
after consummation of the Mergers, the FTC, the Antitrust Division, state
attorneys general or others could take action under antitrust laws with respect
to the Mergers, including seeking to enjoin consummation of the Mergers, to
cause the divestiture of significant assets of PacifiCare or FHP or their
subsidiaries or to impose conditions on PacifiCare Holding with respect to its
business operations. There can be no assurance that a challenge to the Mergers
on antitrust grounds will not be made, or, if such a challenge is made,
PacifiCare or FHP would prevail or would not be required to divest certain
assets or to accept certain conditions in order to consummate the Mergers. See
"The Mergers and Related Transactions -- Regulatory Matters."
VARIATIONS IN VALUE OF FHP COMMON STOCK AND THE FHP MERGER
CONSIDERATION. The relative values of the FHP Common Stock and the FHP Merger
consideration at the Effective Time may vary from the values as of the date
hereof or as of the dates of the respective stockholder votes with respect to
the Mergers because of changes in the operations, profitability and business
prospects of FHP or PacifiCare, market assessments of the likelihood that the
Mergers will be consummated and the timing thereof, the effect of any conditions
or restrictions imposed on or proposed with respect to the Mergers, general
market and economic conditions and other factors. The Final Class A/Common Share
Ratio and Final Class B/Common Share Ratio and the conversion ratio with respect
to the PacifiCare Holding Preferred will be adjusted at the Effective Time to
partially compensate for increases or decreases in the Average Closing Price of
the PacifiCare Class B Common Stock to the extent the increase or decrease
exceeds 7.5% of $68.00. The adjustment, if any, will represent 50% of the change
in excess of 7.5% to a maximum of 30% change, beyond which no further adjustment
will be made. Neither party has the right to terminate the Reorganization
Agreement based on a price change which exceeds 30% of $68.00. See "The Mergers
and Related Consideration -- Merger Consideration."
23
<PAGE>
THE COMPANIES
PACIFICARE HOLDING
PacifiCare Holding, a newly formed Delaware corporation, has not conducted
any business activities to date other than those incident to its formation, its
execution of the Reorganization Agreement and related agreements, its
participation in the preparation of this Joint Proxy Statement/ Prospectus and
the making of various regulatory filings in connection with the transactions
contemplated by the Reorganization Agreement. Immediately following the
consummation of the Mergers, PacifiCare Holding will become a holding company
for PacifiCare and FHP and their respective subsidiaries, and its name will be
changed to "PacifiCare Health Systems, Inc." Accordingly, the businesses
currently conducted by PacifiCare and FHP and their respective subsidiaries will
be the initial businesses of PacifiCare Holding.
The principal executive offices of PacifiCare Holding are located at 5995
Plaza Drive, Cypress, California 90630-5028. PacifiCare Holding's telephone
number is (714) 952-1121.
PACIFICARE
PacifiCare is one of the nation's leading managed health care services
companies, serving as of September 30, 1996, approximately 2,031,000 commercial,
Medicare and Medicaid members. PacifiCare is also a leader in the management,
development and marketing of diversified HMO products and related services.
PacifiCare operates HMOs in California, Florida, Oklahoma, Oregon, Texas and
Washington, which as of September 30, 1996 had a combined commercial membership
of approximately 1,434,000 members. Through internal growth and strategic
acquisitions, PacifiCare believes it has built a strong competitive position in
California and has expanded operations into new and existing geographic markets.
PacifiCare, through its Secure Horizons programs, operates the largest and
one of the fastest growing Medicare risk programs in the United States (as
measured by membership), with approximately 554,000 members enrolled as of
September 30, 1996. PacifiCare believes that its Secure Horizons programs are
attractive to Medicare beneficiaries because they provide a more comprehensive
package of benefits than offered under traditional Medicare and substantially
reduce the member's administrative responsibilities.
PacifiCare's commercial, Medicare and Medicaid program members are provided
some or all of the following health care services: primary and specialty
physician care, hospital care, laboratory and radiology services, prescription
drugs, dental and vision care, skilled nursing care, physical therapy and
psychological counseling. PacifiCare also offers certain specialty products and
services to group purchasers and to other managed care organizations and their
beneficiaries, including life and health insurance, behavioral health service,
dental and vision services and Medicare risk management services.
The principal executive offices of PacifiCare are located at 5995 Plaza
Drive, Cypress, California 90630-5028. PacifiCare's telephone number is (714)
952-1121.
FHP
FHP is one of the nation's leading managed health care companies. FHP,
through its direct and indirect subsidiaries, delivers managed health care
services and sells indemnity health, group life and workers' compensation
insurance. FHP's oldest subsidiary, FHP, Inc., a California corporation, is a
federally qualified, multi-state licensed HMO, which has been operating managed
health care programs since 1961.
As of September 30, 1996, FHP provided a broad range of managed health care
services to more than 1,932,000 HMO members, comprised of commercial and
governmental employees and Medicare beneficiaries, in 11 states and Guam. These
managed health care services include ambulatory and outpatient physician care,
hospital care, prescription drugs, dental and vision care, home health nursing,
skilled nursing care, physical therapy, psychological counseling and health
promotion.
24
<PAGE>
FHP also offers group term life and health insurance products through its
insurance subsidiaries. In addition to its general workers compensation
business, FHP's 24 Hour Managed Care Program-SM- offers in a single package
workers' compensation coverage, HMO plans and group indemnity medical, dental
and life insurance benefit plans through several of its subsidiaries. FHP also
offers third-party administration and utilization review services and several
PPOs.
In June 1995, FHP announced the Restructuring Plan. The Restructuring Plan
was formulated in response to the intensely competitive environment in the HMO
industry and continued declining membership in FHP-operated medical facilities.
The Restructuring Plan consisted of: the sale or other disposition of FHP's
owned and operated hospitals and other in-patient facilities and certain
nonproductive real estate and other assets, a reduction in FHP's workforce, and
the creation of three distinct business segments. These business segments are:
(i) a Network Model HMO; (ii) FHP's group life, health and accident and workers'
compensation insurance and related products (collectively, the "Insurance
Group"); and (iii) Talbert, consisting of a physician practice management
company ("TMMC"), a related ancillary clinical services provider ("THSC") and
various affiliated physician and dentist practice groups ("PCs"). Costs
associated with restructuring, including administrative facility closure costs
and employee separation costs, resulted in pretax charges against earnings of
approximately $75.1 million in the fourth quarter of fiscal 1995, and $9.7
million in fiscal 1996. During fiscal 1996, as part of the Restructuring Plan,
FHP completed sales of its Fountain Valley, California hospital campus, its Salt
Lake City, Utah hospital campus and certain non-productive real estate. See
"Summary -- Selected Historical and Pro Forma Financial and Operating Data --
FHP Selected Historical and Operating Data -- Recent Developments" for a
discussion of a claim by the purchaser of the Fountain Valley, California
hospital. During fiscal 1996, FHP also transferred the operations of two
sub-acute in-patient facilities to other operators. As of September 30, 1996,
limited amounts of real property scheduled for sale remained unsold. Net
proceeds available from the sales of assets have been used primarily for the
reduction of indebtedness and for various other corporate purposes.
The Restructuring Plan included the creation of TMMC and THSC, operational
as of January 1, 1996, as new subsidiaries of FHP, together with the creation of
the PCs. Approximately 4,300 of FHP's employees, including health care
professionals, became employees of TMMC, THSC or the PCs on January 1, 1996.
TMMC leases or subleases all of FHP's medical centers and related assets located
in Southern California, Utah, Arizona, Nevada and New Mexico. FHP's HMOs
contracted with the PCs to provide health care services to approximately 15.7%
of FHP's HMO members, who were already receiving health care in the medical
centers. The PCs have entered into long-term practice management agreements with
TMMC, thereby enabling the PCs and TMMC to do business with other payors and
HMOs, as well as with FHP's HMOs. These third party arrangements are designed to
allow TMMC to utilize excess capacity in the medical centers. TMMC and THSC
currently are 92.25% owned by FHP and 7.75% owned by key employees of FHP and
TMMC. Concurrent with the FHP Merger, it is anticipated that TMMHC will acquire
FHP's interest in TMMC and THSC in exchange for, among other consideration,
rights to purchase 92.25% of TMMHC's Common Stock. FHP and TMMC may determine
not to effect the separation in this manner, in which case the Talbert Rights
would be rights to purchase FHP's interest in TMMC (following its combination
with THSC). Pursuant to the FHP Merger, these Talbert Rights will be issued to
holders of FHP Common Stock and FHP Preferred Stock (on an as-if-converted
basis). In addition, TMMHC has authorized options issuable to TMMHC directors
and employees to purchase up to 180,000 shares (5.7% on a fully diluted basis)
of TMMHC common stock, of which options with respect to 70,350 shares were
outstanding as of November 20, 1996. See "The Mergers and Related Transactions
- -- Talbert Rights Offering."
The principal executive offices of FHP are located at 3120 Lake Center
Drive, Santa Ana, California 92704. FHP's telephone number is (714) 825-6600.
25
<PAGE>
THE PACIFICARE MEETING
PURPOSE OF THE PACIFICARE MEETING
The purpose of the PacifiCare Meeting is to consider and vote upon the
following proposals: (i) the approval and adoption of the Reorganization
Agreement; (ii) the approval and adoption of the PacifiCare Amendment; and (iii)
the approval and adoption of the Second Amended PacifiCare Directors Plan. The
PacifiCare Merger may occur only if both proposals relating to the
Reorganization Agreement and the PacifiCare Amendment are approved and adopted.
DATE, TIME AND PLACE OF MEETING
The PacifiCare Meeting will be held on December 31, 1996 at PacifiCare's
offices at 5995 Plaza Drive, Cypress, California 90630 at 10:00 a.m., Pacific
Standard Time.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of PacifiCare Class A Common Stock at the close of
business on the PacifiCare Record Date are entitled to notice of and to vote at
the PacifiCare Meeting on the approval and adoption of the Reorganization
Agreement and the Second Amended PacifiCare Directors Plan. Holders of record of
PacifiCare Common Stock at the close of business on the PacifiCare Record Date
are entitled to notice of and to vote at the PacifiCare Meeting on the approval
and adoption of the PacifiCare Amendment. As of the close of business on the
PacifiCare Record Date, there were 12,379,658 shares of PacifiCare Class A
Common Stock outstanding and entitled to vote and 18,912,018 shares of
PacifiCare Class B Common Stock outstanding and entitled to vote. As of that
date, there were 219 and 196 holders of record of PacifiCare Class A Common
Stock and PacifiCare Class B Common Stock, respectively. Each holder of
PacifiCare Class A Common Stock is entitled to one vote for each share of
PacifiCare Class A Common Stock held as of the PacifiCare Record Date, and, with
respect to the vote on the PacifiCare Amendment, each holder of PacifiCare Class
B Common Stock is entitled to one vote for each share of PacifiCare Class B
Common Stock held as of the PacifiCare Record Date.
VOTING OF PROXIES
The PacifiCare proxy accompanying this Joint Proxy Statement/Prospectus is
solicited on behalf of the Board of Directors of PacifiCare for use at the
PacifiCare Meeting. Stockholders are requested to complete, date and sign the
accompanying proxy and promptly return it in the accompanying envelope or
otherwise mail it to PacifiCare. All proxies that are properly executed and
returned, and that are not revoked, will be voted at the PacifiCare Meeting in
accordance with the instructions indicated on the proxies or, if no direction is
indicated, to approve and adopt the Reorganization Agreement, the PacifiCare
Amendment and the Second Amended PacifiCare Directors Plan. Other than the
proposals specified in the Notice of the PacifiCare Meeting, no other business
will be conducted at the PacifiCare Meeting. A PacifiCare stockholder who has
given a proxy may revoke it at any time before it is exercised at the PacifiCare
Meeting by: (i) delivering to the Secretary of PacifiCare (by any means,
including facsimile) a written notice, bearing a date later than the date of the
proxy, stating that the proxy is revoked; (ii) signing and so delivering a proxy
relating to the same shares and bearing a later date prior to the vote at the
PacifiCare Meeting; or (iii) attending the PacifiCare Meeting and voting in
person (although attendance at the PacifiCare Meeting will not, by itself,
revoke a proxy).
VOTE REQUIRED
Approval and adoption of the Reorganization Agreement requires the
affirmative vote of the holders of a majority of the outstanding shares of
PacifiCare Class A Common Stock entitled to vote.
Approval and adoption of the PacifiCare Amendment requires the affirmative
vote of the holders of a majority of the outstanding shares of PacifiCare Class
A Common Stock entitled to vote and the holders of a majority of the outstanding
shares of PacifiCare Class B Common Stock entitled to vote, each voting
separately as a class.
Approval and adoption of the Second Amended PacifiCare Directors Plan
requires the affirmative vote of a majority of the outstanding shares of
PacifiCare Class A Common Stock voting.
26
<PAGE>
UniHealth, the largest holder of PacifiCare Class A Common Stock, has
contractually agreed to vote all shares of PacifiCare Class A Common Stock that
it beneficially owns for approval and adoption of the Reorganization Agreement
and the PacifiCare Amendment. Pursuant to a voting and non-disposition
agreement, dated as of August 4, 1996, between FHP and UniHealth (the "UniHealth
Voting Agreement"), UniHealth has agreed, subject to certain limitations, to:
(i) vote the shares of PacifiCare Class A Common Stock beneficially owned by it
in favor of the Reorganization Agreement and the PacifiCare Amendment; (ii) not
dispose of such shares prior to the PacifiCare Meeting; and (iii) grant a proxy
to certain officers of FHP to so vote. UniHealth has indicated that it intends
to vote the shares of PacifiCare Class B Common Stock it holds in favor of
approval and adoption of the PacifiCare Amendment. UniHealth beneficially owns
approximately 47.7% of the outstanding PacifiCare Class A Common Stock and 1.5%
of the outstanding PacifiCare Class B Common Stock. See "The Mergers and Related
Transactions -- Voting and Non-Disposition Agreements" and "Ownership of
PacifiCare, FHP and PacifiCare Holding." The executive officers and directors of
PacifiCare have indicated that they intend to vote in favor of approval of the
Reorganization Agreement and the PacifiCare Amendment. On the PacifiCare Record
Date, such officers and directors beneficially owned approximately 2.0% of the
then outstanding shares of PacifiCare Class A Common Stock and approximately
1.0% of the then outstanding shares of PacifiCare Class B Common Stock.
BOARD RECOMMENDATIONS
THE PACIFICARE BOARD OF DIRECTORS BELIEVES THAT THE MERGERS ARE FAIR TO AND
IN THE BEST INTERESTS OF PACIFICARE AND ITS STOCKHOLDERS AND THEREFORE
UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE REORGANIZATION AGREEMENT AND
UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE PACIFICARE AMENDMENT. THE
PACIFICARE BOARD OF DIRECTORS ALSO BELIEVES THAT THE SECOND AMENDED PACIFICARE
DIRECTORS PLAN IS IN THE BEST INTEREST OF PACIFICARE AND UNANIMOUSLY RECOMMENDS
A VOTE FOR APPROVAL OF THE SECOND AMENDED PACIFICARE DIRECTORS PLAN.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The required quorum for the transaction of the business contemplated herein
at the PacifiCare Meeting is a majority of the shares of the PacifiCare Class A
Common Stock and a majority of the shares of PacifiCare Class B Common Stock
outstanding on the PacifiCare Record Date. Abstentions and broker non-votes each
will be included in determining whether a quorum is present. Abstentions will be
counted towards the tabulation of votes cast; broker non-votes will not be so
counted. Abstentions and broker non-votes each will have the same effect as a
vote against the Reorganization Agreement and the PacifiCare Amendment.
SOLICITATION OF PROXIES AND EXPENSES
PacifiCare will bear the entire cost of the solicitation of the proxies of
PacifiCare stockholders, including preparation, assembly, printing and mailing
of this Joint Proxy Statement/Prospectus, the proxy and any additional
information furnished to its stockholders. PacifiCare has engaged the firm of
Corporate Investor Communications, Inc. ("CIC") to assist it in the distribution
and solicitation of proxies and has agreed to pay CIC a fee of $10,000 plus
expenses for its services. Copies of the solicitation materials will be
furnished to banks, brokerage houses, fiduciaries and custodians holding in
their names shares of PacifiCare Common Stock beneficially owned by others to
forward to such beneficial owners. PacifiCare may reimburse persons representing
beneficial owners of PacifiCare Common Stock for their costs of forwarding
solicitation materials to such beneficial owners. Original solicitation of
proxies by mail may be supplemented by telephone, telegram, letter or personal
solicitation by directors, officers or employees of PacifiCare and by CIC. No
additional compensation will be paid to directors, officers or employees for
such services.
AVAILABILITY OF ACCOUNTANTS
A representative of Ernst & Young LLP is expected to be present at the
PacifiCare Meeting. The representative will be available to respond to
appropriate questions, and will have the opportunity to make a statement.
27
<PAGE>
THE FHP MEETING
PURPOSE OF THE FHP MEETING
The purpose of the FHP Meeting is to consider and vote upon the following
proposals: (i) the approval and adoption of the Reorganization Agreement; (ii)
the approval and adoption of the Series A Amendment; (iii) the election of three
directors to hold office for three-year terms; and (iv) the ratification of the
appointment of independent auditors. Approval of the Series A Amendment is not a
condition to the completion of the FHP Merger. Approval and adoption of the
Series A Amendment will result in holders of FHP Preferred Stock receiving cash
and PacifiCare Holding Preferred in lieu of the consideration currently required
by the FHP Certificate. Holders of FHP Preferred Stock making an Irrevocable
Election will receive such consideration whether or not the Series A Amendment
is approved.
DATE, TIME AND PLACE OF MEETING
The FHP Meeting will be held on December 31, 1996 at 2:00 p.m., Pacific
Standard Time, at the FHP University Building, 3515 Harbor Boulevard, Costa
Mesa, California.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of FHP Capital Stock at the close of business on the
FHP Record Date are entitled to notice of and to vote at the FHP Meeting. As of
the close of business on the FHP Record Date, there were 41,214,595 shares of
FHP Common Stock outstanding and entitled to vote and 21,035,804 shares of FHP
Preferred Stock outstanding and entitled to vote. As of that date, there were
625 and 158 holders of record of the FHP Common Stock and the FHP Preferred
Stock, respectively. Each holder of FHP Common Stock is entitled to one vote for
each share of FHP Common Stock held as of the FHP Record Date, and, with respect
to the Series A Amendment, each holder of FHP Preferred Stock is entitled to one
vote for each share of FHP Preferred Stock held as of the FHP Record Date.
VOTING OF PROXIES
The FHP proxy accompanying this Joint Proxy Statement/Prospectus is
solicited on behalf of the FHP Board of Directors for use at the FHP Meeting.
Stockholders are requested to complete, date and sign the accompanying proxy and
promptly return it in the accompanying envelope or otherwise mail it to FHP. All
proxies that are properly executed and returned, and that are not revoked, will
be voted at the FHP Meeting in accordance with the instructions indicated on the
proxies or, if no direction is indicated, to approve and adopt the
Reorganization Agreement and the Series A Amendment, to elect the three
nominated directors identified herein and to ratify the appointment of the
independent auditors. FHP's Board of Directors does not presently intend to
bring any business before the FHP Meeting other than the specific proposals
referred to in this Joint Proxy Statement/Prospectus and specified in the notice
of the FHP Meeting. As to any business that may properly come before the FHP
Meeting, however, it is intended that proxies, in the form enclosed, will be
voted in respect thereof in accordance with the judgment of the persons voting
such proxies. An FHP stockholder who has given a proxy may revoke it at any time
before it is exercised at the FHP Meeting, by: (i) delivering to the Secretary
of FHP (by any means, including facsimile) a written notice, bearing a date
later than the date of the proxy, stating that the proxy is revoked; (ii)
signing and so delivering a proxy relating to the same shares and bearing a
later date prior to the vote at the FHP Meeting; or (iii) attending the FHP
Meeting and voting in person (although attendance at the FHP Meeting will not,
by itself, revoke a proxy).
VOTE REQUIRED OF FHP COMMON STOCK
The affirmative vote of the holders of a majority of the outstanding FHP
Common Stock entitled to vote is necessary to adopt and approve the
Reorganization Agreement and the Series A Amendment. The affirmative vote of a
majority of the FHP Common Stock present at the meeting is necessary to ratify
the appointment of the independent auditors. Directors will be elected by a
28
<PAGE>
plurality of the votes cast by the holders of FHP Common Stock. Each share of
FHP Common Stock is entitled to one vote on each matter on which the holders of
such shares are entitled to vote as set forth above.
On the FHP Record Date, directors and executive officers of FHP and their
affiliates and Other Persons (as defined below) beneficially owned and were
entitled to vote approximately 4.2% of the outstanding FHP Common Stock. The
directors and executive officers of FHP have indicated that they intend to vote
their shares of FHP Common Stock in favor of approval and adoption of the
Reorganization Agreement, the Series A Amendment, the election of the three
nominated directors identified herein and the ratification of the independent
auditors.
Jack R. Anderson, Richard M. Burdge, Sr. and Westcott W. Price III have each
entered into a voting and non-disposition agreement with PacifiCare
(collectively the "FHP Stockholder Voting Agreements") with respect to shares
beneficially owned by them and certain shares beneficially owned by family
trusts and relatives as to which they disclaim beneficial ownership ("Other
Persons"). As of the FHP Record Date, Messrs. Anderson, Burdge and Price
beneficially owned and were entitled to vote approximately 2.4% of the
outstanding FHP Common Stock and approximately 9.8% of the outstanding FHP
Preferred Stock, and the Other Persons beneficially collectively owned and were
entitled to vote approximately 1.2% of the outstanding FHP Common Stock and
approximately 6.9% of the outstanding FHP Preferred Stock. Pursuant to such
agreements, Messrs. Anderson, Burdge and Price have: (i) agreed to vote the
shares beneficially owned by them in favor of the Reorganization Agreement and
the Series A Amendment; (ii) agreed to use their best efforts to cause the Other
Persons to vote in favor of the Reorganization Agreement and the Series A
Amendment; (iii) granted proxies to officers of PacifiCare to vote shares
beneficially owned by them in favor of the Reorganization Agreement and the
Series A Amendment; and (iv) agreed to use their best efforts to cause the Other
Persons to deliver proxies to PacifiCare to vote shares beneficially owned by
such Other Persons in favor of the Reorganization Agreement and the Series A
Amendment. As of the FHP Record Date, proxies with respect to approximately 1.2%
of the outstanding FHP Common Stock and approximately 6.9% of the outstanding
FHP Preferred Stock had been received by PacifiCare from the Other Persons.
Participants in the ESOP are entitled to instruct the ESOP trustee on how to
vote: (i) all shares of FHP Common Stock allocated to participants' accounts
under the ESOP; and (ii) a proportionate number of unallocated shares of FHP
Common Stock held by the ESOP for future allocation to participants' accounts.
Participants will receive a voting instruction card to direct the trustee to
vote both allocated and unallocated shares. If the trustee receives an
instruction card on a timely basis from a participant, it will vote the
participant's allocated shares and his proportionate share of unallocated shares
as the participant instructs. If the trustee does not timely receive an
instruction card from a participant, the trustee will vote the participant's
allocated shares and his proportionate share of unallocated shares in accordance
with the instructions of the other participants who provide voting instructions
to the trustee on a timely basis. If a participant signs and timely returns an
instruction card without indicating a vote, the trustee will vote that
participant's allocated shares in accordance with the recommendations of the
Board of Directors.
VOTE REQUIRED OF FHP PREFERRED STOCK
The affirmative vote of the holders of 66 2/3% of the outstanding FHP
Preferred Stock entitled to vote is necessary to adopt and approve the Series A
Amendment. Each share of FHP Preferred Stock (including shares as to which
Irrevocable Elections have been made) is entitled to one vote on such matter.
As of the FHP Record Date, directors and executive officers of FHP and their
affiliates beneficially owned and were entitled to vote approximately 17.4% of
the outstanding FHP Preferred Stock. The directors and executive officers of FHP
have indicated that they intend to vote their shares of
29
<PAGE>
FHP Preferred Stock in favor of approval of the Series A Amendment. Certain
directors and executive officers of FHP are contractually bound by the FHP
Stockholder Voting Agreements to vote in favor of the Series A Amendment. See
"-- Vote Required of FHP Common Stock."
EFFECT OF FAILURE TO APPROVE THE SERIES A AMENDMENT
In the event that the Series A Required Vote is not received for the Series
A Amendment, then within five days of the Effective Time, FHP shall give the
Conversion Notice in accordance with the FHP Certificate to all holders of FHP
Preferred Stock (other than holders who have made an Irrevocable Election as to
all of their shares) that a "Change of Control" (as defined in the FHP
Certificate) has occurred and that such holders have certain "Special Conversion
Rights" (as defined in the FHP Certificate). Each such holder will then have the
right to exercise such Special Conversion Rights or to receive the
As-If-Converted Merger Consideration. See "The Mergers and Related Transactions
- -- Merger Consideration -- FHP Preferred Stock."
BOARD RECOMMENDATIONS
THE FHP BOARD OF DIRECTORS BELIEVES THAT THE MERGERS ARE FAIR TO AND IN THE
BEST INTERESTS OF FHP AND ITS STOCKHOLDERS AND THEREFORE UNANIMOUSLY RECOMMENDS
A VOTE FOR APPROVAL OF THE REORGANIZATION AGREEMENT AND UNANIMOUSLY RECOMMENDS A
VOTE FOR APPROVAL OF THE SERIES A AMENDMENT. THE FHP BOARD OF DIRECTORS ALSO
RECOMMENDS A VOTE FOR THE ELECTION OF THE THREE NOMINATED DIRECTORS IDENTIFIED
HEREIN AND THE RATIFICATION OF THE INDEPENDENT AUDITORS.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The required quorum for the transaction of the business contemplated at the
FHP Meeting, other than the adoption and approval of the Series A Amendment, is
a majority of the shares of the FHP Common Stock outstanding on the FHP Record
Date. The required quorum for the approval of the Series A Amendment is a
majority of the shares of FHP Common Stock and a majority of the shares of FHP
Preferred Stock (including shares of FHP Preferred Stock as to which Irrevocable
Elections have been made) outstanding on the FHP Record Date. Abstentions and
broker non-votes each will be included in determining whether a quorum is
present. Abstentions will be counted towards the tabulation of votes cast;
broker non-votes will not be so counted. Abstentions and broker non-votes each
will have the same effect as a vote against the Reorganization Agreement and the
Series A Amendment.
SOLICITATION OF PROXIES AND EXPENSES
FHP will bear the cost of the solicitation of the proxies of FHP
stockholders, except that PacifiCare will bear the cost of assembly, printing
and mailing of this Joint Proxy Statement/Prospectus. FHP has engaged the firm
of Georgeson & Company Inc. ("Georgeson") to assist it in the distribution and
solicitation of proxies and has agreed to pay Georgeson a fee of $10,000 plus
expenses for its services. Copies of the solicitation materials will be
furnished to banks, brokerage houses, fiduciaries and custodians holding in
their names shares of FHP Capital Stock beneficially owned by others to forward
to such beneficial owners. FHP may reimburse persons representing beneficial
owners of FHP Capital Stock for their costs of forwarding solicitation materials
to such beneficial owners. Original solicitation of proxies by mail may be
supplemented by telephone, telegram, letter or personal solicitation by
directors, officers or employees of FHP and by Georgeson. No additional
compensation will be paid to directors, officers or employees for such services.
30
<PAGE>
THE MERGERS AND RELATED TRANSACTIONS
MERGER CONSIDERATION
FHP
FHP COMMON STOCK. Upon consummation of the FHP Merger, each share of FHP
Common Stock outstanding immediately prior to the Effective Time (except for
shares held by FHP as treasury stock, any shares held by PacifiCare, FHP or any
subsidiary of PacifiCare or FHP and shares for which appraisal rights have been
properly exercised and perfected) shall be converted into the right to receive:
(i) $17.50 in cash;
(ii) the Final Class A/Common Share Ratio (as defined below) of a share
of PacifiCare Holding Class A Common;
(iii) the Final Class B/Common Share Ratio (as defined below) of a share
of PacifiCare Holding Class B Common; and
(iv) Talbert Rights.
See "-- Talbert Rights Offering" and "Description of PacifiCare Holding
Capital Stock."
The Final Class A/Common Share Ratio will be determined by dividing
2,350,000 by the sum of (i) the number of shares of FHP Common Stock issued and
outstanding immediately before the Effective Time and (ii) if the Series A
Amendment is not approved, the number of shares of FHP Common Stock into which
the FHP Preferred Stock outstanding immediately prior to the Effective Time
could be converted (excluding shares of FHP Preferred Stock for which an
Irrevocable Election is made).
The Final Class B/Common Share Ratio will be the difference between the
Final Exchange Ratio and the Final Class A/Common Share Ratio. The Final
Exchange Ratio will be the product of 0.258 and a multiplier ("Multiplier")
ranging in value from 0.8875 to 1.1125. The Multiplier will be determined by:
(i) calculating the "Closing Price/Signing Price Ratio," equivalent to the
quotient of the Average Closing Price of PacifiCare Class B Common Stock divided
by $68.00; and (ii) referring to the table below to locate the corresponding
Multiplier set forth across from the range into which the calculated Closing
Price/Signing Price Ratio falls:
<TABLE>
<CAPTION>
MULTIPLIER CLOSING PRICE/SIGNING PRICE RATIO
- ------------------------------------------------- -------------------------------------------------
<S> <C>
0.8875 above 1.30
One minus (0.5 times (the Closing Price/ Signing 1.075 to 1.30
Price Ratio less 1.075))
1 0.925 to 1.075
One plus (0.5 times (0.925 less the Closing 0.70 to 0.925
Price/Signing Price Ratio))
1.1125 less than 0.70
</TABLE>
The effect of the above formula is to partially offset the effect of changes
in the price of PacifiCare Class B Common Stock above or below the range $62.90
to $73.10.
31
<PAGE>
The following table sets forth the fraction of a share of PacifiCare Holding
Class A Common and PacifiCare Holding Class B Common to be received by a holder
of FHP Common Stock under several different assumptions relating to the Average
Closing Price of PacifiCare Class B Common Stock. The table is calculated on the
assumption that there are 41,214,595 shares of FHP Common Stock and 21,035,804
shares of FHP Preferred Stock outstanding and that the Series A Amendment is
approved.
<TABLE>
<CAPTION>
AVERAGE CLOSING PRICE FINAL CLASS A/ FINAL CLASS B/ FINAL
OF PACIFICARE CLASS B COMMON SHARE COMMON SHARE EXCHANGE
COMMON STOCK MULTIPLIER RATIO RATIO RATIO
- --------------------- ----------- ----------------- ----------------- -----------
<S> <C> <C> <C> <C>
$88.40 or above .8875 .057 .172 .229
$80.00 .9493 .057 .188 .245
$62.90 to $73.10 1.0000 .057 .201 .258
$55.00 1.0581 .057 .216 .273
$47.60 or less 1.1125 .057 .230 .287
</TABLE>
The following table shows the same fractions under the same assumptions
except assuming that the Series A Amendment is not approved (and no Irrevocable
Elections are made):
<TABLE>
<CAPTION>
AVERAGE CLOSING PRICE FINAL CLASS A/ FINAL CLASS B/ FINAL
OF PACIFICARE CLASS B COMMON SHARE COMMON SHARE EXCHANGE
COMMON STOCK MULTIPLIER RATIO RATIO RATIO
- --------------------- ----------- ----------------- ----------------- -------------
<S> <C> <C> <C> <C>
$88.40 or above .8875 .040 .189 .229
$80.00 .9493 .040 .205 .245
$62.90 to $73.10 1.0000 .040 .218 .258
$55.00 1.0581 .040 .233 .273
$47.60 or less 1.1125 .040 .247 .287
</TABLE>
In the event the Series A Amendment is not approved and an Irrevocable
Election is made, the final ratios will be between those set forth in the above
tables.
FHP PREFERRED STOCK. Upon consummation of the FHP Merger, if the Series A
Amendment is approved, each share of FHP Preferred Stock outstanding immediately
prior to the Effective Time (except for shares held by FHP as treasury stock,
any shares held by PacifiCare, FHP, or any subsidiary of PacifiCare or FHP and
shares for which appraisal rights have been properly exercised and perfected)
shall be converted into the right to receive:
(i) $14.113 in cash;
(ii) 0.50 shares of PacifiCare Holding Preferred; and
(iii)Talbert Rights
(collectively, the "Series A Merger Consideration").
See "Description of PacifiCare Holding Capital Stock" and "-- Talbert Rights
Offering."
The PacifiCare Holding Preferred will be convertible into PacifiCare Holding
Class B Common upon the terms and conditions, and will have the rights,
preferences and privileges, set forth in the Restated Certificate. The
PacifiCare Holding Preferred is generally similar to the FHP Preferred Stock
except that it pays an annual dividend of $1.00 per share rather than $1.25 per
share and is convertible into PacifiCare Holding Class B Common. Each share of
FHP Preferred Stock as to which an Irrevocable Election is made would also
receive the Series A Merger Consideration. See "Description of PacifiCare
Holding Capital Stock."
Approval of the Series A Amendment is not a condition to the completion of
the FHP Merger. If the Series A Amendment is not approved, FHP will promptly
(and in any event within five days of the Effective Time) send to each holder of
FHP Preferred Stock who has not made an Irrevocable Election as to all of such
holder's FHP Preferred Stock the Conversion Notice indicating that a "Change of
Control" (as defined in the FHP Certificate) has occurred and that such holders
may exercise certain "Special Conversion Rights" (as defined in the FHP
Certificate), by delivery of written notice of exercise within 55 days after the
date of the Conversion Notice, together with the stock certificates
32
<PAGE>
representing such FHP Preferred Stock, duly endorsed for transfer. Such notice
will also give such holders of FHP Preferred Stock the right to waive their
Special Conversion Rights and instead receive the As-If-Converted FHP Merger
Consideration. Subject to antidilution adjustment, for each share of FHP
Preferred Stock this would be approximately 0.80645 times the consideration
received by a share of FHP Common Stock, or $14.113 in cash; approximately
0.80645 times the Final Class A/Common Share Ratio of a share of PacifiCare
Class A Common Stock; and approximately 0.80645 times the Final Class B/Common
Share Ratio of a share of PacifiCare Class B Common Stock.
The Special Conversion Rights will give the holders of FHP Preferred Stock
who have not made an Irrevocable Election as to all of their FHP Preferred Stock
the right to elect to receive, for each share of FHP Preferred Stock as to which
an Irrevocable Election has not been made, in addition to Talbert Rights,
either: (i) the consideration to be received by a holder of a single share of
FHP Common Stock times a fraction, the numerator of which is $25.00 and the
denominator of which is the closing price of FHP Common Stock on the last
business day prior to the date PacifiCare Holding gives the Conversion Notice;
or (ii) $25.00 in cash, plus accrued but unpaid dividends. Notwithstanding the
foregoing, PacifiCare Holding will have the right to pay any such holder who
elects the consideration described in clause (i) of the previous sentence $25.00
in cash per share of FHP Preferred Stock, plus any accrued but unpaid dividends.
Any such holders of FHP Preferred Stock who do not timely exercise their Special
Conversion Rights will thereafter have only the right to surrender their shares
of FHP Preferred Stock and receive the As-If-Converted FHP Merger Consideration.
At assumed prices for PacifiCare Class A Common Stock and PacifiCare Class B
Common Stock of $71.00 and $74.00, respectively (using such prices as an
estimate for the values of the PacifiCare Holding Class A Common and the
PacifiCare Holding Class B Common to be issued) and assuming an Average Closing
Price of PacifiCare Class B Common Stock of $74.00, the As-If-Converted FHP
Merger Consideration would be valued at approximately $29.26 (excluding any
value for the Talbert Rights) and it would be uneconomic for any such holder of
FHP Preferred Stock to exercise such holder's Special Conversion Rights.
The following table sets forth the consideration to be received for a single
share of FHP Preferred Stock if the Series A Amendment is approved (or an
Irrevocable Election as to such share is made) and alternatively if it is not so
approved (and no Irrevocable Elections are made). The table assumes that the
Average Closing Price of PacifiCare Class B Common Stock is $74.00 so that the
Final Exchange Ratio is .256, the Final Class A/Common Share Ratio is .040, the
Final Class B/Common Share Ratio is .216 and that there are 41,214,595 shares of
FHP Common Stock and 21,035,804 shares of FHP Preferred Stock outstanding at the
Effective Time:
<TABLE>
<CAPTION>
SERIES A
AMENDMENT
APPROVED OR SERIES A
IRREVOCABLE AMENDMENT
ELECTION MADE NOT APPROVED (1)
----------------- -----------------
<S> <C> <C>
Cash....................................................................... $14.113 $14.113
PacifiCare Holding Class A Common.......................................... None 0.032 shares
PacifiCare Holding Class B Common.......................................... None 0.174 shares
PacifiCare Holding Preferred............................................... 0.50 shares(2) None
Talbert Rights............................................................. Yes Yes
</TABLE>
- ------------------------
(1) Assumes Special Conversion Rights are not exercised and no Irrevocable
Elections are made.
(2) Convertible into .206 shares of PacifiCare Holding Class B Common based on
the assumptions set forth above.
IRREVOCABLE ELECTION BY FHP PREFERRED STOCKHOLDERS. By following the
procedures described herein, holders of FHP Preferred Stock may irrevocably
elect to receive in the FHP Merger the Series A Merger Consideration whether or
not the Series A Amendment is approved.
Holders of FHP Preferred Stock desiring to make an Irrevocable Election
should complete the Form of Irrevocable Election accompanying this Joint Proxy
Statement/Prospectus, transmit the
33
<PAGE>
certificate(s) representing shares of FHP Preferred Stock (or comply with the
procedures for guaranteed delivery set forth below) as to which an Irrevocable
Election is made, and otherwise comply with the instructions set forth in the
Form of Irrevocable Election.
In order for an Irrevocable Election to be effective, AST must receive a
properly completed Form of Irrevocable Election, accompanied by all stock
certificates representing shares of FHP Preferred Stock currently held by such
holder as to which an Irrevocable Election is made, no later than 5:00 p.m.,
Eastern Standard Time, on December 27, 1996. Any Irrevocable Election shall be
applicable to all the shares represented by stock certificates delivered.
Holders of FHP Preferred Stock whose stock certificates are not immediately
available may also make an Irrevocable Election by completing the Form of
Irrevocable Election and following the procedures for guaranteed delivery set
forth in the Form of Irrevocable Election, which require that Box C (Guaranty of
Delivery) of the Form of Irrevocable Election be properly completed and duly
executed by a member of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., or a commercial bank or trust
company having an office or correspondent in the United States (subject to the
condition that the stock certificates, the delivery of which is thereby
guaranteed, are in fact delivered to AST no later than 5:00 p.m., Eastern
Standard Time, on January 2, 1997 (the "Guaranteed Delivery Deadline"). If AST
has not received a properly completed Form of Irrevocable Election, accompanied
by stock certificates, by the Irrevocable Election Deadline (unless the
procedures for guaranteed delivery are followed and such certificates are
received by AST by the Guaranteed Delivery Deadline), the Irrevocable Election
will not be effective.
By completing and submitting the Form of Irrevocable Election (and otherwise
complying with the procedures for making an Irrevocable Election), a holder of
FHP Preferred Stock irrevocably elects, upon consummation of the FHP Merger, to
receive the Series A Merger Consideration for all shares of FHP Preferred Stock
covered by the Form of Irrevocable Election in lieu of such holder's right to
exercise Special Conversion Rights or receive the As-If-Converted FHP Merger
Consideration and irrevocably agrees not to convert such shares of FHP Preferred
Stock to FHP Common Stock or gift, sell, hypothecate or in any other manner
transfer such shares of FHP Preferred Stock to any person who does not expressly
accept such stock subject to such Irrevocable Election and does not agree to be
bound thereby. Notwithstanding the foregoing, the restrictions imposed by the
Irrevocable Election shall lapse if the Reorganization Agreement shall terminate
in accordance with its terms prior to the Effective Time. If a holder of FHP
Preferred Stock fails to make an effective Irrevocable Election, if the
Irrevocable Election is deemed by AST or FHP to be defective in any way, or if
the Form of Irrevocable Election is not accompanied by stock certificates
(unless such holder follows the procedures for guaranteed delivery and such
stock certificates are received by AST prior to the Guaranteed Delivery
Deadline), a holder of FHP Preferred Stock will not receive the Series A Merger
Consideration unless the Series A Amendment is approved and the FHP Merger is
consummated. See "-- FHP Preferred Stock."
Holders of FHP Preferred Stock who make an Irrevocable Election are still
entitled to vote and are encouraged to vote FOR the Series A Amendment either in
person or by proxy.
TALBERT RIGHTS. By virtue of the FHP Merger, each share of FHP Common Stock
and FHP Preferred Stock outstanding immediately prior to the Effective Time
shall be converted in part into rights to purchase a proportionate share (on an
as-if-converted basis) of 2,767,500 shares of common stock of TMMHC or TMMC, as
the case may be. See "-- Talbert Rights Offering."
PACIFICARE
Upon consummation of the PacifiCare Merger (except for shares held by
PacifiCare as treasury stock, any shares held by PacifiCare, FHP or any
subsidiary of PacifiCare or FHP):
(i) each share of PacifiCare Class A Common Stock outstanding
immediately prior to the Effective Time shall be converted into the right to
receive one share of PacifiCare Holding Class A Common; and
34
<PAGE>
(ii) each share of PacifiCare Class B Common Stock outstanding
immediately prior to the Effective Time shall be converted into the right to
receive one share of PacifiCare Holding Class B Common.
OTHER MATTERS
STOCK OPTIONS AND BENEFIT PLANS. For a description of the treatment of the
FHP and PacifiCare stock options and employee benefit plans, see "-- Stock
Options; Benefit Plans."
APPRAISAL RIGHTS. Holders of the FHP Capital Stock are entitled to exercise
appraisal rights in connection with the FHP Merger. Holders of the PacifiCare
Common Stock are not entitled to exercise appraisal rights in connection with
the PacifiCare Merger. See "-- Appraisal Rights."
STOCK SUBJECT TO CONDITIONS. If any shares of FHP Common Stock or
PacifiCare Common Stock outstanding immediately prior to the Effective Time are
unvested or are subject to a repurchase option, risk of forfeiture or other
condition under any applicable stock purchase agreement, restriction agreement
or other agreement with FHP or PacifiCare, then the shares of PacifiCare Holding
Common issued in exchange for the shares of FHP Common Stock or PacifiCare
Common Stock, as the case may be, will also be unvested or subject to the same
repurchase option, risk of forfeiture or other condition, unless such condition
terminates by virtue of the applicable Merger pursuant to the express terms of
such agreement. The certificates evidencing such shares of PacifiCare Holding
Common may accordingly be marked with appropriate legends.
BACKGROUND OF THE MERGERS
Commencing in November 1995, FHP's senior management held discussions with
Merrill Lynch and other investment bankers concerning FHP's strategic
alternatives. These discussions included the possible separation of Talbert, the
making of acquisitions and the possibility of a strategic business combination.
In January 1996, the FHP Board of Directors authorized management to explore
a spin-off of Talbert.
In the period of March through July 1996, members of senior management and
members of the FHP Board of Directors held exploratory discussions with a number
of possible candidates for a business combination.
In June 1996, as part of such discussions, the President of FHP met with the
Chairman of PacifiCare to discuss a possible business combination. Shortly
thereafter, the Presidents and Chief Financial Officers of the two companies met
to commence exploration of a possible combination. Management of PacifiCare
brought the matter to the attention of the PacifiCare Special Committee. Dillon
Read, which had previously been engaged by PacifiCare, analyzed a potential
combination with FHP, as well as other potential strategic alternatives and made
presentations to the PacifiCare Special Committee and the PacifiCare Board of
Directors in late June and early July. The PacifiCare Special Committee and the
PacifiCare Board of Directors requested that management continue exploring a
possible business combination with FHP.
In July 1996, FHP retained Merrill Lynch to serve as its financial advisor
in connection with the exploration of possible business combinations.
On July 11, 1996, a meeting was held between FHP's President and Chief
Financial Officer and PacifiCare's President and Chief Financial Officer in
which a possible business combination was discussed. The July 11th meeting was
followed by a meeting on July 15, 1996, between the Chairman of the FHP Board of
Directors, the President of FHP and the President of PacifiCare at which
PacifiCare indicated a willingness, subject to due diligence, to acquire FHP,
including Talbert, for up to $35 per share. The Chairman and President of FHP
informally advised members of the FHP Board of Directors of the existence of the
proposal on July 15, 1996. Also on July 15, 1996, PacifiCare management and its
financial and legal advisors met with both the PacifiCare Special Committee and
certain members of the UniHealth Board of Directors to further discuss the
potential FHP transaction.
35
<PAGE>
At a meeting of the FHP Board of Directors held on July 16, 1996, the FHP
Board of Directors was advised of the existence of an oral offer for a business
combination with PacifiCare. The FHP Board of Directors requested that its
Executive Committee explore strategic alternatives and report back to the FHP
Board of Directors.
On July 17, 1996, certain FHP directors and executive officers held
discussions with certain PacifiCare directors and executive officers and Dillon
Read with respect to a proposed business combination. In the July 17, 1996
discussions, the parties discussed a possible transaction at an equivalent value
of $35 per share of which 50% would be paid in cash and 50% would be paid in
shares of PacifiCare Class A Common Stock and Class B Common Stock issued in
proportion to the shares currently outstanding in each such class and in which
stockholders of FHP would receive the right to acquire FHP's holdings in
Talbert. The parties discussed various means of structuring the transaction. The
parties discussed the terms on which FHP Preferred Stock would be converted and
discussed other issues in a business combination, including a price protection
formula for the exchange and the treatment of outstanding FHP Options.
PacifiCare expressed the view that it would not be in a position to issue
PacifiCare Class A and Class B Common Stock in proportion similar to the then
outstanding PacifiCare Class A and Class B Common Stock and would not enter into
a transaction unless there was a break-up fee of $60 million and irrevocable
proxies were made available from Messrs. Anderson, Burdge and Price. FHP
expressed the view that it would not be willing to enter into the transaction
unless the transaction preserved the directors' ability to negotiate an
alternative transaction pursuant to its fiduciary duties to FHP and the break-up
fee was established at a lower amount, among other issues. FHP also indicated
that it would require an irrevocable proxy from UniHealth. The parties failed to
reach agreement on a number of significant issues at the meeting.
Following these discussions, FHP and PacifiCare each undertook a due
diligence investigation of the other. The PacifiCare Special Committee and the
UniHealth Board of Directors were both briefed on the status of the proposed
combination on July 22, 1996. On July 29, 1996, the Chairman and President of
FHP and representatives of Merrill Lynch briefed certain FHP directors on the
status of discussions, the results of due diligence, other alternatives
considered and discussions pursued, and the prospect of further negotiations
with respect to the terms of a transaction.
Representatives of FHP and PacifiCare met again on July 30, 1996. At this
meeting, PacifiCare proposed that the consideration per share of FHP Common
Stock would be $35, payable in a combination of cash and stock, and that the
Talbert shares would be the subject of a rights offering to the holders of FHP
Common Stock and FHP Preferred Stock. The rights offering of shares of Talbert
would be conditioned on the entry into an "at market" provider agreement between
FHP and Talbert and the capitalization of Talbert by FHP, such that Talbert
would have approximately $59 million in cash and a book value not to exceed $60
million. The parties also discussed a proposal to seek an amendment to the terms
of the outstanding FHP Preferred Stock providing for its exchange for cash and a
new PacifiCare Holding Preferred which would bear a 4% dividend and be
convertible into PacifiCare Holding Class B Common. PacifiCare also proposed to
reduce the break-up fee from $60 million to $50 million.
The parties were unable to agree at this meeting on the percentage of shares
to be delivered in PacifiCare Holding Class A Common, on the form of the
transaction, or on a formula for adjusting the number of shares of capital stock
to be issued in the event of changes in the market prices of PacifiCare Common
Stock. FHP had requested that the transaction be structured as a transaction
which would satisfy Section 351 for tax purposes in order that shares received
by FHP stockholders could be received on a tax-free basis. On July 31, 1996, the
parties discussed terms whereby 2,350,000 shares of PacifiCare Holding Class A
Common would be included in the consideration payable for FHP Common Stock and
an amendment would be sought to the terms of the FHP Preferred Stock under which
FHP Preferred Stock would be exchanged for cash and a new series of PacifiCare
Holding Preferred Stock that would be convertible into PacifiCare Holding Class
B Common. In these discussions, the parties agreed to use a Section 351
structure involving PacifiCare Holding, which would own both PacifiCare and FHP.
36
<PAGE>
Following such discussions, management of each company directed the
preparation of the Original Reorganization Agreement, subject to receipt of
approval of the FHP Board of Directors and the PacifiCare Board of Directors of
the terms and conditions of the proposed transaction.
The PacifiCare Special Committee met on August 1, 1996 and reviewed the
transactions contemplated by the Original Reorganization Agreement. After
hearing presentations from management and PacifiCare's financial and legal
advisors, the PacifiCare Special Committee recommended to the full PacifiCare
Board of Directors that it approve the terms of the Original Reorganization
Agreement, subject to receipt of a fairness opinion from Dillon Read. At a
meeting on August 2, 1996, the full PacifiCare Board of Directors reviewed the
transaction, received presentations from its financial and legal advisors, and
thoroughly discussed the terms of the proposed transaction, including the
remaining issues to be negotiated. The meeting was reconvened on August 4, 1996
at which time Dillon Read presented its written opinion that, as of such date,
the consideration to be paid by PacifiCare pursuant to the Original
Reorganization Agreement was fair to the PacifiCare stockholders from a
financial point of view. The PacifiCare Board of Directors then unanimously
approved the terms of the Original Reorganization Agreement and the PacifiCare
Amendment and directed the officers of PacifiCare to finalize the Original
Reorganization Agreement on terms substantially similar to those presented to
the PacifiCare Board of Directors and to execute a definitive agreement.
On August 3, 1996, a meeting of the FHP Board of Directors was held. With
the advice and assistance of FHP's management and financial and legal advisors,
the FHP Board of Directors reviewed the transactions contemplated by the
proposed Original Reorganization Agreement. At the meeting, FHP's financial and
legal advisors made presentations to its Board of Directors concerning the
proposed transaction, and Merrill Lynch provided its oral opinion to the effect
that as of such date the consideration to be received by the holders of FHP
Capital Stock, other than PacifiCare and its affiliates, was fair to such
stockholders from a financial point of view. The FHP Board of Directors
extensively discussed the terms of the proposed transaction, the feasibility of
consummating the transaction and FHP's alternatives. After discussion, the FHP
Board of Directors unanimously approved the terms of the Original Reorganization
Agreement, the transactions contemplated thereby and the Series A Amendment. The
FHP Board of Directors authorized the President of FHP to complete the
negotiation of the terms of the Original Reorganization Agreement consistent
with the terms presented to it and to execute a definitive agreement. The
Original Reorganization Agreement was executed on August 4, 1996 and was
publicly announced on August 5, 1996.
On September 17, 1996, the parties executed the First Amended Reorganization
Agreement, which provided an alternative exchange formula in the event that the
Series A Amendment was not approved, and which clarified various other
provisions of the Original Reorganization Agreement. A meeting of the PacifiCare
Board of Directors approving the First Amended Reorganization Agreement took
place on August 30, 1996. A meeting of the FHP Board of Directors approving the
First Amended Reorganization Agreement took place on September 17, 1996.
As of November 11, 1996, the parties executed the Reorganization Agreement,
which added provisions for Irrevocable Elections by holders of Series A
Preferred and clarified certain other provisions. A meeting of the PacifiCare
Board of Directors approving the Reorganization Agreement took place on November
9, 1996. A meeting of the FHP Board of Directors approving the Reorganization
Agreement took place on November 13, 1996.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS AND REASONS FOR THE MERGERS
PACIFICARE
At a meeting begun on August 2, 1996 and reconvened on August 4, 1996, the
PacifiCare Board of Directors, by unanimous vote: (i) determined that the terms
of the Original Reorganization Agreement and the transactions contemplated
thereby are in the best interests of PacifiCare and its stockholders; and (ii)
approved the Original Reorganization Agreement and the transactions contemplated
thereby. At such meeting, the PacifiCare Board of Directors also recommended
that PacifiCare stockholders approve and adopt the Original Reorganization
Agreement and approve and adopt the
37
<PAGE>
PacifiCare Amendment. In reaching the foregoing conclusions and recommendations,
the PacifiCare Board of Directors considered the recommendation of the
PacifiCare Special Committee to enter into the Original Reorganization Agreement
and a number of additional factors including the following:
(i) the presentations and views expressed by management of PacifiCare
(at the August 2-4, 1996 PacifiCare Board of Directors meeting, as well as
previously held meetings of the PacifiCare Board of Directors and the
PacifiCare Special Committee) regarding: (a) the alternatives available to
PacifiCare if it did not pursue a transaction with FHP and the possible
effects on PacifiCare if FHP were to enter into a similar transaction with
another company; (b) the financial condition, results of operations,
business and prospects of each of PacifiCare, FHP and the combined company;
and (c) the long-term changes taking place in the market for managed care
and PacifiCare's strategy relative to them;
(ii) the strategic fit between PacifiCare and FHP, which, in
PacifiCare's view, offers the opportunity for significant synergies (see "--
Estimated Synergies") through, among other things:
(a) opportunities for streamlining administrative functions of the
businesses of PacifiCare and FHP by eliminating redundancies in the
administration of health care operations in areas served by both
companies and by eliminating duplicative corporate functions;
(b) opportunities for efficiencies in sales and marketing by reducing
overlapping advertising and promotion costs and by combining duplicative
operations;
(c) the potential for savings in medical costs in California by
increased utilization of the most cost effective provider contracts of
each company, as well as the possibility of favorable renegotiation when
current contract terms end;
(d) the effect of implementing the separation of Talbert;
(e) the combined company's primary focus on a contiguous geographical
area;
(f) the potential for expanding nationally the combined company's
expertise in providing managed care to Medicare beneficiaries, in part by
leveraging PacifiCare's Secure Horizons brand of products for Medicare
beneficiaries;
(g) the potential for growth by expanding into states which are
currently served by FHP but not PacifiCare; and
(h) opportunities to enhance revenue or reduce costs by utilizing
those capabilities of either FHP or PacifiCare which the other does not
have.
(iii) the fact that PacifiCare stockholders would continue to own more
than 67% of the combined company, subject to adjustment;
(iv) the long-term interests of PacifiCare and its stockholders, as well
as the interests of PacifiCare's employees, customers, providers, creditors
and suppliers and community and societal considerations, including those of
communities in which any office or other facility of PacifiCare is located;
(v) the belief that the combined company would be better able to respond
to the needs of consumers and customers, the increased competitiveness of
the health care industry, and the opportunities that changes in the health
care industry might bring;
(vi) the oral presentation made by Dillon Read at the August 2, 1996
PacifiCare Board of Directors meeting and the opinion of Dillon Read to the
effect that, as of August 4, 1996, the consideration to be paid to the FHP
stockholders pursuant to the Original Reorganization Agreement was fair,
from a financial point of view, to PacifiCare and its stockholders (see "--
Opinions of Financial Advisors -- Opinion of Dillon Read");
38
<PAGE>
(vii) the sources, and terms and conditions, of capital available to
PacifiCare to finance the transaction with FHP, including the availability
of approximately $1.5 billion to be borrowed in connection with the Mergers,
and the combined company's ability to service such debt (see "-- Financing
of FHP Merger Consideration");
(viii) the terms and conditions of the Original Reorganization Agreement
and the other agreements to be entered into in connection with the Mergers;
(ix) the regulatory approvals required to consummate the Mergers,
including antitrust approvals and insurance and/or various state and federal
regulatory approvals, and the prospects of receiving such approvals;
(x) the results of the due diligence review of FHP conducted by
PacifiCare's management and legal and financial advisors;
(xi) the terms of the proposed PacifiCare Holding Preferred, including
the proposed 4.0% dividend;
(xii) the terms and conditions of the UniHealth Voting Agreement and the
FHP Stockholder Voting Agreements including the fact that the parties to
such FHP agreements had, among other things, agreed: (a) to vote their
shares of FHP in favor of the Original Reorganization Agreement and against
any competing proposal for a merger or business combination involving FHP;
and (b) except in limited circumstances, not to sell or otherwise dispose of
their shares of FHP Common Stock and FHP Preferred Stock other than pursuant
to the Original Reorganization Agreement; and
(xiii) the termination fees potentially payable by or to PacifiCare. See
"The Reorganization Agreement -- Expenses and Termination Fees."
At a meeting held August 30, 1996, the PacifiCare Board of Directors met to
consider the terms of the First Amended Reorganization Agreement and by
unanimous vote of all directors present determined that the terms of the First
Amended Reorganization Agreement and the transactions contemplated thereby are
in the best interests of PacifiCare and its stockholders, approved the First
Amended Reorganization Agreement and the transactions contemplated thereby and
recommended that the PacifiCare stockholders approve and adopt the First Amended
Reorganization Agreement and ratified and readopted their previous approval and
adoption of the PacifiCare Amendment. In addition to the factors described
above, the PacifiCare Board of Directors considered the financial effects if the
FHP Merger were approved and Series A Amendment were not approved by the holders
of FHP Preferred Stock and Dillon Read's oral opinion, subsequently confirmed in
writing, reconfirming its prior opinion that the consideration to be paid to the
FHP stockholders pursuant to the First Amended Reorganization Agreement is fair,
from a financial point of view, to PacifiCare and its stockholders. The full
text of the Dillon Read Opinion, which sets forth the procedures followed, the
factors considered and the asumptions made by Dillon Read, is attached as
Appendix B to this Joint Proxy Statement/Prospectus and is incorporated herein
by reference. Stockholders of PacifiCare are urged to read the Dillon Read
Opinion carefully and in its entirety. See "-- Opinions of Financial Advisors --
Opinion of Dillon Read."
At a meeting held November 9, 1996, the PacifiCare Board of Directors met to
consider the terms of the Reorganization Agreement and by unanimous vote of all
directors present determined that the terms of the Reorganization Agreement and
the transactions contemplated thereby are in the best interests of PacifiCare
and its stockholders, approved the Reorganization Agreement and the transactions
contemplated thereby, recommended that the PacifiCare stockholders approve and
adopt the Reorganization Agreement and ratified and readopted their previous
approval and adoption of the PacifiCare Amendment. In addition to the factors
described above, the PacifiCare Board of Directors considered the potential
effects of adding provisions for the making of Irrevocable Elections by holders
of FHP Preferred Stock. The PacifiCare Board of Directors also noted that the
effect of Irrevocable Elections would be the payment of, if the Series A
Amendment were not approved, consideration
39
<PAGE>
representing a blend of the consideration that would have been paid under the
First Amended Reorganization Agreement if the Series A Amendment were approved
and if the Series A Amendment were not approved.
The foregoing discussion of the information and factors considered by the
PacifiCare Board of Directors is not intended to be exhaustive, but includes all
material factors considered by the PacifiCare Board of Directors. The PacifiCare
Board of Directors did not assign relative weights to the above factors or
determine that any factor was of particular importance. A determination of
various weightings would, in the view of the PacifiCare Board of Directors, be
impractical. Rather, the PacifiCare Board of Directors viewed its position and
recommendations as being based on the totality of the information presented to,
and considered by, it. In addition, individual members of the PacifiCare Board
of Directors may have given different weight to different factors.
It is expected that if the Mergers are not consummated, PacifiCare's
management, with oversight from the PacifiCare Board of Directors, will continue
to manage PacifiCare as an ongoing business.
FOR THE REASONS DESCRIBED ABOVE, THE PACIFICARE BOARD OF DIRECTORS HAS
UNANIMOUSLY APPROVED THE REORGANIZATION AGREEMENT, THE PACIFICARE AMENDMENT AND
THE TRANSACTIONS CONTEMPLATED THEREBY AND RECOMMENDS THAT PACIFICARE
STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE REORGANIZATION AGREEMENT AND
FOR APPROVAL AND ADOPTION OF THE PACIFICARE AMENDMENT.
FHP
At a special meeting held on August 3, 1996, the FHP Board of Directors
unanimously: (i) determined that the terms of the Mergers and the transactions
contemplated thereby were fair and in the best interests of FHP and its
stockholders; and (ii) approved the Original Reorganization Agreement, the
transactions contemplated thereby and the Series A Amendment. At such meeting,
the FHP Board of Directors recommended that the FHP stockholders approve and
adopt the Original Reorganization Agreement and the Series A Amendment. In
reaching these determinations, the FHP Board of Directors consulted with
management of FHP as well as FHP's financial and legal advisors.
In reaching such determination, the FHP Board of Directors considered a
number of factors, including, but not limited to, the following:
(i) the opportunity presented for holders of FHP Common Stock and FHP
Preferred Stock to realize a portion of the value of their investment in
cash, while at the same time retaining a portion of their investment in a
significantly stronger and geographically more diverse participant in the
managed health care industry;
(ii) the opportunity the business combination offers for substantial
synergies (see "-- Estimated Synergies") and the transaction structure which
allows FHP stockholders, to the extent they receive PacifiCare Holding
Common or PacifiCare Holding Preferred in the FHP Merger, to participate in
these synergies through continued ownership of a portion of the combined
company;
(iii) the oral presentation made by Merrill Lynch at the August 3, 1996
FHP Board of Directors meeting, to the effect that, as of August 3, 1996,
the consideration to be received by the holders of FHP Common Stock and FHP
Preferred Stock, other than PacifiCare and its affiliates, was fair to such
stockholders from a financial point of view. The full text of the opinion of
Merrill Lynch, dated as of August 4, 1996, which sets forth the assumptions
made, matters considered and certain limitations on the scope of review
undertaken by Merrill Lynch is attached as Appendix C to this Joint Proxy
Statement/Prospectus and is incorporated herein by reference. Stockholders
of FHP are urged to read the opinion of Merrill Lynch carefully and in its
entirety (see "Opinions of Financial Advisors -- Opinion of Merrill Lynch");
40
<PAGE>
(iv) the fact that the rights offering of shares of Talbert would give
holders of FHP Common Stock and FHP Preferred Stock the opportunity to
continue their investment in Talbert, if they so elect, or to potentially
realize additional consideration by selling the rights in the open market,
if a market for the rights develops;
(v) the fact that the FHP Board of Directors believed that it was
unlikely that any other party would propose a business combination that,
taken as a whole, would be more favorable to FHP and its stockholders;
(vi) the uncertainties of the health care industry in the United States,
the likelihood of continued consolidation in the managed health care sector
and the possibility that changes in the industry, depending on their nature,
could be disadvantageous to FHP;
(vii) the historical trading prices of the shares of FHP Common Stock and
the fact that the FHP Merger consideration represented a value (exclusive of
the Talbert Rights) of approximately $35.00 per share for each share of FHP
Common Stock, a premium of approximately $7.125 (26%) over $27.875, the
closing price for the shares of FHP Common Stock on the Nasdaq National
Market on August 2, 1996, the last trading day prior to the announcement of
the execution of the Original Reorganization Agreement and a premium of
$12.00 (52%) over the closing price of $23.00 on July 12, 1996, the last
trading day prior to July 15, 1996, when the initial offer by PacifiCare was
made;
(viii) the belief that the combined company would be better able to
respond to the needs of consumers and customers, the increased
competitiveness of the health care industry, and the opportunities that
changes in the health care industry might bring;
(ix) the fact that as of the date of the Original Reorganization
Agreement approximately 50% of the FHP Merger consideration (excluding the
Talbert Rights) would be paid in cash, that closing would not be subject to
a financing contingency, and that PacifiCare would be obligated to deliver a
financing commitment with respect to the cash portion of the consideration
prior to the execution of the Original Reorganization Agreement;
(x) the opportunity for holders of FHP Preferred Stock to receive
$14.113 in cash plus one-half of a similar share of PacifiCare Holding
Preferred with a dividend yield of 4.0% and the ability to convert such
PacifiCare Holding Preferred into PacifiCare Holding Class B Common;
(xi) the fact that FHP stockholders would be partially protected from
market fluctuation in the value of PacifiCare Holding Common pursuant to a
formula which will provide no adjustment within a range of plus or minus
7.50% from $68.00 per share of PacifiCare Class B Common Stock and an
adjustment of 50.0% on changes greater than 7.50% up to a maximum exchange
ratio of 0.287 (at $47.60) and a minimum exchange ratio of 0.229 (at
$88.40);
(xii) the fact that two FHP designees would become directors of
PacifiCare Holding following the Mergers;
(xiii) the opportunity for holders of FHP Common Stock and FHP Preferred
Stock to receive, as part of the FHP Merger consideration, shares of
PacifiCare Holding Class A Common and Class B Common and PacifiCare Holding
Preferred, respectively, in an exchange that could be tax-free for federal
income tax purposes (see "The Mergers and Related Transactions -- Certain
Federal Income Tax Consequences");
(xiv) the prospects of receiving the regulatory approvals required to
consummate the Mergers, including, among other things, antitrust approvals
and federal and state regulatory approvals;
(xv) the fact that the FHP Board of Directors would have the right to
engage in negotiations with or furnish information to third parties in
response to an unsolicited Acquisition Proposal if, after consultation with
independent counsel, it determines that it is necessary to do so in order to
comply with its fiduciary duties;
41
<PAGE>
(xvi) the fact that the FHP Board of Directors would have the right, upon
payment to PacifiCare of a termination fee, to terminate the Reorganization
Agreement if the FHP stockholders fail to approve the Reorganization
Agreement and the FHP Board of Directors has withdrawn, amended or modified
in a manner adverse to PacifiCare its unanimous recommendation of the
Reorganization Agreement, or has entered into any agreement with respect to
or has approved or endorsed any competing Acquisition Proposal which the FHP
Board of Directors determines is more favorable to FHP stockholders;
(xvii) the fact that FHP would be entitled to a termination fee of $100
million if PacifiCare is unable to close the transaction due to a financing
breach and a termination fee of $50 million if the PacifiCare Meeting is
held and the PacifiCare stockholders fail to approve the Mergers for any
reason; and
(xviii) the results of the due diligence review of PacifiCare conducted by
FHP's management and legal and financial advisors.
The foregoing discussion of the information and factors considered by the
FHP Board of Directors is not intended to be exhaustive, but includes all
material factors considered by the FHP Board of Directors. The FHP Board of
Directors did not assign relative weights to the above factors or determine that
any factor was of particular importance. A determination of various weightings
would, in the view of the FHP Board of Directors, be impractical. Rather, the
FHP Board of Directors viewed its position and recommendations as being based on
the totality of the information presented to, and considered by, the FHP Board
of Directors. In addition, individual members of the FHP Board of Directors may
have given different weights to different factors.
At a meeting held on September 17, 1996, the FHP Board of Directors
unanimously approved the First Amended Reorganization Agreement and recommended
that the FHP stockholders approve and adopt the First Amended Reorganization
Agreement. In addition to the factors described above, the FHP Board of
Directors considered (i) the effect on FHP stockholders if the FHP Merger was
approved and the Series A Amendment was not approved; and (ii) Merrill Lynch's
determination that the changes reflected in the First Amended Reorganization
Agreement (including the terms of the Restated Certificate) did not require any
modification to the Merrill Lynch Opinion.
At a meeting held on November 13, 1996, the FHP Board of Directors
unanimously approved the Reorganization Agreement and recommended that the FHP
stockholders approve and adopt the Reorganization Agreement. In addition to the
factors described above, the FHP Board of Directors considered (i) that it would
be advantageous to holders of FHP Preferred Stock to have the opportunity to
elect to receive the consideration contemplated by the Reorganization Agreement
even if the Series A Amendment is not approved, and (ii) Merrill Lynch's
determination that the changes reflected in the Reorganization Agreement
(including the terms of the Restated Certificate) did not require any
modification to the Merrill Lynch Opinion.
The full text of the Merrill Lynch Opinion, which sets forth the assumptions
made, general procedures followed, matters considered, methods employed and
limitations in the review undertaken by Merrill Lynch in arriving at its opinion
is attached hereto as Appendix C and is incorporated herein by reference.
Stockholders of FHP are urged to read the Merrill Lynch Opinion carefully and in
its entirety (see "-- Opinions of Financial Advisors -- Opinion of Merrill
Lynch").
It is expected that if the Mergers are not consummated, FHP's management,
with oversight from the FHP Board of Directors, will continue to manage FHP as
an ongoing business.
FOR THE REASONS DESCRIBED ABOVE, THE FHP BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE REORGANIZATION AGREEMENT, THE SERIES A AMENDMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY AND RECOMMENDS THAT FHP STOCKHOLDERS VOTE FOR
APPROVAL AND ADOPTION OF THE REORGANIZATION AGREEMENT AND THE SERIES A
AMENDMENT.
42
<PAGE>
OPINIONS OF FINANCIAL ADVISORS
OPINION OF DILLON READ
The PacifiCare Board of Directors has received the Dillon Read Opinion to
the effect that the consideration to be paid to the holders of FHP Common Stock
and FHP Preferred Stock pursuant to the First Amended Reorganization Agreement
is fair to PacifiCare and PacifiCare's stockholders from a financial point of
view. THE FULL TEXT OF THE DILLON READ OPINION, WHICH SETS FORTH ASSUMPTIONS
MADE, GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED AND METHODS EMPLOYED BY
DILLON READ IN ARRIVING AT ITS OPINION IS ATTACHED HERETO AS APPENDIX B AND IS
INCORPORATED HEREIN BY REFERENCE. The summary of the Dillon Read Opinion
contained in this Joint Proxy Statement/Prospectus is qualified in its entirety
by reference to the full text of such opinion. Holders of PacifiCare Common
Stock are urged to and should read the opinion in its entirety.
As of August 4, 1996, Dillon Read: (i) reviewed certain business and
historical financial information relating to PacifiCare and FHP; (ii) reviewed
certain financial forecasts and other data provided to Dillon Read by FHP and
PacifiCare relating to the business prospects of PacifiCare and FHP; (iii)
conducted discussions with senior management of FHP and PacifiCare with respect
to, among other things, the business prospects of PacifiCare and FHP; (iv)
reviewed the historical market trading prices and trading volumes of the FHP
Common Stock; (v) compared the proposed financial terms of the Mergers with the
financial terms of certain other mergers and acquisition transactions that
Dillon Read believed to be generally comparable to the Mergers; (vi) reviewed
publicly available financial and stock market data with respect to certain other
companies in lines of business that Dillon Read believes to be generally
comparable to those of FHP; (vii) considered the pro forma financial effects of
the Mergers on PacifiCare; and (viii) conducted such other financial studies,
analyses and investigations, and considered such other information as Dillon
Read deemed necessary in arriving at its opinion. Dillon Read subsequently
reviewed the differences between the First Amended Reorganization Agreement and
the Original Reorganization Agreement.
In connection with its review, Dillon Read did not assume any responsibility
for independent verification of any of the foregoing information and, with
PacifiCare's consent, relied on its being complete and accurate in all material
respects. In addition, Dillon Read did not make any independent evaluation or
appraisal of any of the assets or liabilities (contingent or otherwise) of
PacifiCare or FHP or any of their subsidiaries, nor was Dillon Read furnished
with any such evaluation or appraisal. With respect to financial forecasts,
Dillon Read assumed that they had been reasonably prepared on bases reflecting
the best currently available estimates at the time and judgments of the
respective management of PacifiCare and FHP as to the future financial
performance of their respective companies. Dillon Read's opinion was based upon
market, economic and monetary conditions existing as of the date of the opinion.
The amount of consideration to be paid to the holders of FHP Capital Stock
pursuant to the Reorganization Agreement was determined through negotiations
between PacifiCare and FHP.
In connection with rendering its opinion, Dillon Read considered a variety
of valuation methods. The material valuation methods used are summarized below.
These analyses taken together support Dillon Read's opinion.
COMPARABLE COMPANY ANALYSIS. Using publicly available information, Dillon
Read analyzed, based upon market trading values, multiples of certain financial
criteria (including latest twelve months revenues, latest twelve months earnings
before interest expense, taxes, depreciation and amortization ("EBITDA"),
projected net income for two years and book value) used to value certain other
companies, which, in Dillon Read's judgment, were generally comparable to FHP
for the purpose of this analysis. The comparable company analysis was comprised
of seven publicly held HMO businesses. These businesses included: Foundation
Health Corporation, Health Systems International, Inc., PacifiCare, WellPoint
Health Networks, Inc., Healthsource, Inc., Humana, Inc. and United HealthCare
Corporation.
43
<PAGE>
The range and mean for market capitalization as a multiple of each of the
indicated statistics for the comparable companies were as follows: (i) book
value -- 1.5x to 3.1x with a mean of 2.1x; (ii) estimated calendar 1996 earnings
(based upon estimates from industry sources) -- 8.3x to 16.5x, with a mean of
12.7x; (iii) estimated calendar 1997 earnings (based upon estimates from
industry sources) -- 7.0x to 13.3x, with a mean of 10.4x. The adjusted market
capitalization (defined as market capitalization plus the book value of debt) as
a multiple of each of the indicated statistics for the comparable companies were
as follows: (i) latest twelve months revenues -- 0.5x to 1.0x, with a mean of
0.7x; and (ii) latest twelve months EBITDA -- 4.9x to 9.2x, with a mean of 7.3x.
Dillon Read analyzed the terms of the Mergers in two sets of analyses: (i)
by examining the operating performance of FHP inclusive of Talbert; and (ii) by
considering the operating performance of FHP recast for the anticipated Talbert
Rights Offering. Including the operations of Talbert, FHP's multiples based upon
the consideration to be paid to the holders of the FHP Common Stock and FHP
Preferred Stock in connection with the Merger, which as of August 4, 1996, had a
value of $35.00 per share, were as follows: (i) book value -- 1.8x; (ii)
estimated calendar year 1996 earnings (based upon estimates from industry
sources) -- 22.4x; (iii) estimated calendar year 1997 earnings (based upon
estimates from industry sources) -- 18.8x; (iv) latest twelve months revenues --
0.6x; and (v) latest twelve months EBITDA -- 10.5x. Excluding Talbert's
operations, FHP's multiples based upon the consideration to be paid to the
holders of FHP Common Stock and FHP Preferred Stock in connection with the
Mergers, were as follows: (i) book value -- 0.7x; (ii) estimated calendar year
1996 earnings (based upon estimates from industry sources adjusted for the
Talbert spin-off) -- 17.5x; (iii) estimated calendar year 1997 earnings (based
upon estimates from industry sources adjusted for the Talbert spin-off) --
15.4x; (iv) latest twelve months revenues -- 0.7x; and (v) latest twelve months
EBITDA -- 8.7x. Dillon Read believed that both analyses yielded multiples that
supported Dillon Read's view as of such date that the consideration to be paid
to the holders of FHP Common Stock and FHP Preferred Stock is fair, from a
financial point of view to PacifiCare and PacifiCare's stockholders, because
taken as a whole, the ratios described above were within the range of, or less
than, selected public comparable multiples.
COMPARABLE MERGERS AND ACQUISITIONS. Using publicly available information,
Dillon Read analyzed, based upon the purchase price of the equity of the
acquired companies and total transaction values, multiples of certain financial
criteria (such as projected net income for two years and for the period 12
months following, book value, revenues and EBITDA) used to value certain mergers
and acquisitions of acquired companies.
The merger and acquisition transactions which were analyzed included eight
transactions completed or pending in the HMO industry which, in Dillon Read's
judgment, were generally comparable to the Mergers for the purposes of this
analysis. The acquisitions reviewed by Dillon Read, in reverse chronological
order of announcement date, included: (i) the acquisition of U.S. Healthcare,
Inc. by Aetna Life and Casualty Company; (ii) the acquisition of Healthwise of
America, Inc. by United HealthCare Corporation; (iii) the acquisition of
CareNetwork, Inc. by Humana, Inc.; (iv) the acquisition of Gencare Health
Systems, Inc. by United HealthCare Corporation; (v) the acquisition of
Intergroup Healthcare Corporation by Foundation Health Corporation; (vi) the
acquisition of TakeCare, Inc. by FHP; (vii) the acquisition of Ramsay-HMO, Inc.
by United HealthCare Corporation; and (viii) the acquisition of HMO America,
Inc. by United HealthCare Corporation.
The range and mean for the purchase price of equity as a multiple of each of
the indicated statistics for the above transactions were as follows: (i)
estimated current calendar year earnings (based upon estimates from industry
sources) -- 20.9x to 28.3x, with a mean of 25.1x; (ii) estimated next calendar
year earnings (based upon estimates from industry sources) -- 18.0x to 23.0x,
with a mean of 20.7x; (iii) estimated earnings for the period twelve months
following (based upon estimates from industry sources) -- 20.1x to 27.2x, with a
mean of 23.3x; and (iv) book value -- 4.3x to 19.6x, with a mean of 9.7x. The
range and mean for the transaction value (defined as purchase price of equity
44
<PAGE>
plus the book value of debt) as a multiple of each of the indicated statistics
for the group of comparable acquisitions were as follows: (i) latest twelve
months revenues 0.8x to 2.4x with a mean of 1.6x; and (ii) latest twelve months
EBITDA -- 13.7x to 19.1x with a mean of 17.1x.
Including the operations of Talbert, FHP's multiples based upon the
consideration to be paid to the holders of FHP Common Stock and FHP Preferred
Stock in connection with the Mergers (which, at the time Dillon Read performed
its analyses, had a value of approximately $35.00 per share) were as follows:
(i) estimated current calendar year earnings -- 22.4x; (ii) estimated next
calendar year earnings -- 18.8x; (iii) estimated earnings for the period twelve
months following -- 20.2x; (iv) book value -- 1.8x; (v) latest twelve months
revenues -- 0.6x, and (vi) latest twelve months EBITDA -- 10.5x. Excluding FHP's
Talbert operations, FHP's multiples based upon the consideration to be paid to
the holders of FHP Common Stock and FHP Preferred Stock in connection with the
Mergers, were as follows: (i) estimated current calendar year earnings -- 17.5x;
(ii) estimated next calendar year earnings -- 15.4x; (iii) estimated earnings
for the period twelve months following -- 16.5x; (iv) book value -- 1.8x; (v)
latest twelve months revenues -- 0.7x; and (vi) latest twelve months EBITDA --
8.7x. Dillon Read believed that these multiples supported Dillon Read's view
that the consideration to be paid to the holders of the FHP Common Stock and FHP
Preferred Stock is fair, from a financial point of view to PacifiCare and
PacifiCare's stockholders, because taken as a whole, the ratios described above
were within the range of, or less than, the selected comparable acquisition
multiples.
DISCOUNTED CASH FLOW ANALYSIS. Dillon Read calculated the present value of
the future streams of after-tax cash flows that FHP could be expected to produce
in the future. The analysis utilized financial and operating information
relating to the business, operations and prospects of FHP based upon estimates
from industry sources and relied on certain assumptions with respect to FHP's
future business and operations. Dillon Read calculated terminal values for FHP
by applying to projected earnings a range of multiples based on the analysis of
the transaction multiples of comparable HMO transactions. The cash flow streams
and terminal values were then discounted to present values using a range of
discount rates from 12% to 20%, which were chosen based on several assumptions
regarding factors such as inflation rates, interest rates, the inherent risk in
FHP's health plans, as well as the HMO industry as a whole, and the cost of
capital of FHP. The analysis yielded a range of values for FHP Common Stock of
$27.77 to $49.36 per share. Dillon Read believed that the discounted cash flow
analysis supported Dillon Read's view that the consideration to be paid to the
holders of FHP Common Stock and FHP Preferred Stock is fair, from a financial
point of view to PacifiCare and PacifiCare's stockholders, because the
consideration to be paid valued at the time of Dillon Read's analyses was within
the range of present values of FHP's future cash flows.
Dillon Read also calculated the present value of future streams of after-tax
cashflows based on estimates of future FHP operating performance prepared by the
management of PacifiCare which included assumptions regarding various cost
savings and other synergies estimated to result from the Mergers. Dillon Read
used the same terminal multiples and discount rates discussed above. The
analysis yielded a range of values for FHP Common Stock of $36.21 to $64.80 per
share. Dillon Read believed that the discounted cash flow analysis supported
Dillon Read's view that the consideration to be paid to the holders of FHP
Common Stock and FHP Preferred Stock is fair, from a financial point of view to
PacifiCare and PacifiCare's stockholders, because the consideration to be paid
valued at the time of Dillon Read's analyses was below the range of present
values of FHP's future cash flows.
TRADING HISTORY OF THE COMMON STOCK. Dillon Read analyzed the price history
of FHP Common Stock during calendar year 1995 and the first seven months of
calendar year 1996. The trading history of the FHP Common Stock was examined to
evaluate the relative reasonableness of the market price of the FHP Common Stock
in light of historical trading levels. Dillon Read believed that FHP's trading
history supported Dillon Read's view that the consideration to be paid to the
holders of FHP Common Stock and FHP Preferred Stock is fair, from a financial
point of view to PacifiCare and PacifiCare's stockholders, pursuant to the
calculation of the exchange ratio as described herein.
45
<PAGE>
PRO FORMA MERGER ANALYSIS. Dillon Read also analyzed certain pro forma
financial effects of the Mergers on PacifiCare. This analysis was based upon
certain assumptions, including, without limitation, the following: (i)
PacifiCare's management projections; (ii) FHP projections for the fiscal years
1997 through 2001 pro forma for the separation of Talbert as prepared by
PacifiCare management; and (iii) the operating synergies between 1997 and 2001
as prepared by PacifiCare's management.
Based upon such assumptions, Dillon Read's pro forma analysis of the
financial effects of the Mergers indicated that these effects were accretive to
PacifiCare's net income for the years in the forecasted period of 1997 through
2001.
Dillon Read believes that its analyses must be considered as a whole and
that selecting portions of its analyses and other factors considered by it,
without considering all factors and analyses, could create a misleading view of
the processes underlying its opinion. Dillon Read did not quantify the effect of
each factor upon its opinion. Dillon Read made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond PacifiCare's and Dillon Read's control. Any
estimates contained in Dillon Read's analyses are not necessarily indicative of
actual values, which may be significantly more or less favorable than as set
forth therein. Estimates of the financial value of companies do not purport to
be appraisals or necessarily reflect the prices at which companies actually may
be sold. Because such estimates inherently are subject to uncertainty, none of
PacifiCare, FHP, PacifiCare Holding, Dillon Read or any other person assumes
responsibility for their accuracy. In rendering its opinion, Dillon Read
expressed no view as to the range of values at which the PacifiCare Holding
Common or PacifiCare Holding Preferred may trade following consummation of the
Mergers, nor did Dillon Read make any recommendations to the PacifiCare
stockholders with respect to how such stockholders should vote on the Mergers,
or to the advisability of disposing of or retaining such PacifiCare Holding
Common or PacifiCare Holding Preferred following the Mergers.
The PacifiCare Board of Directors selected Dillon Read as its financial
advisor because Dillon Read is a nationally recognized investment banking firm
with substantial experience in transactions similar to the Mergers. As a part of
its investment banking business, Dillon Read is continually engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions.
Dillon Read participated in the initial public offering of PacifiCare Common
Stock, has participated in subsequent, additional offerings of PacifiCare Common
Stock, has acted as managing underwriter for some of the additional offerings
and has received customary fees for the rendering of such services. In the
ordinary course of business, Dillon Read trades such common stock for its own
account and the accounts of its customers and, accordingly, may at any time hold
a long or short position in such securities.
Pursuant to the engagement letter between PacifiCare and Dillon Read,
PacifiCare has paid Dillon Read for its services a fee of $1,000,000 and has
agreed to pay Dillon Read for its services an additional fee of approximately
$7,000,000 upon the closing of the Mergers. PacifiCare has also agreed to
reimburse Dillon Read for its reasonable expenses, including attorneys' fees,
and to indemnify Dillon Read against certain liabilities in connection with its
engagement.
OPINION OF MERRILL LYNCH
FHP has retained Merrill Lynch to act as its financial advisor in connection
with the Mergers. Merrill Lynch delivered its oral opinion to FHP's Board of
Directors on August 3, 1996, which opinion was confirmed in writing, as of
August 4, 1996, to the effect that, as of such date, and based upon the
assumptions made, general procedures followed, factors considered and limits on
the review undertaken as set forth in such opinion, the proposed consideration
to be received in the Mergers by the holders of FHP Common Stock and the holders
of FHP Preferred Stock, other than, in each case, PacifiCare and its affiliates,
was fair to such holders from a financial point of view.
THE FULL TEXT OF THE MERRILL LYNCH OPINION, WHICH SETS FORTH THE ASSUMPTIONS
MADE, GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED, METHODS EMPLOYED AND
LIMITATIONS IN THE REVIEW UNDERTAKEN BY MERRILL LYNCH
46
<PAGE>
IN ARRIVING AT ITS OPINION IS ATTACHED HERETO AS APPENDIX C AND IS INCORPORATED
HEREIN BY REFERENCE. The following summary of the Merrill Lynch Opinion
contained in this Joint Proxy Statement/Prospectus is qualified in its entirety
by reference to the full text of such opinion. Holders of the FHP Common Stock
and the FHP Preferred Stock are urged to, and should, read this opinion in its
entirety. Terms defined in this summary shall have such meaning solely for
purposes of this summary and of the Merrill Lynch Opinion. The Merrill Lynch
Opinion is directed only to the fairness from a financial point of view of the
consideration to be received by holders of the FHP Common Stock and the FHP
Preferred Stock (other than, in each case, PacifiCare and its affiliates)
pursuant to the Reorganization Agreement and does not constitute a
recommendation to any stockholder of FHP as to how such stockholder should vote
with respect to the Reorganization Agreement and the transactions contemplated
thereby. The proposed consideration to be received by FHP stockholders pursuant
to the Reorganization Agreement was determined through negotiations between FHP
and PacifiCare.
In arriving at the Merrill Lynch Opinion, Merrill Lynch, among other things:
(i) reviewed FHP's Annual Reports, Forms 10-K and related financial information
for the five fiscal years in the period ended June 30, 1995 and FHP's Forms 10-Q
and the unaudited financial information for the quarterly periods ended
September 30, 1995, December 31, 1995 and March 31, 1996; (ii) reviewed
PacifiCare's Annual Reports, Forms 10-K and related financial information for
the five fiscal years in the period ended September 30, 1995 and PacifiCare's
Forms 10-Q and the related unaudited financial information for the quarterly
periods ended December 31, 1995 and March 31, 1996; (iii) reviewed certain
information, including financial forecasts, relating to the business, earnings,
cash flow, assets and prospects of FHP and PacifiCare, furnished to Merrill
Lynch by FHP and PacifiCare; (iv) conducted discussions with members of senior
management of FHP and PacifiCare concerning their respective businesses and
prospects and estimated synergies resulting from the Mergers; (v) reviewed the
historical market prices and trading activity for FHP Common Stock and the
PacifiCare Common Stock and compared them with that of certain publicly traded
companies which Merrill Lynch deemed to be reasonably similar to FHP and
PacifiCare, respectively; (vi) compared the results of operations of FHP and
PacifiCare with that of certain companies which Merrill Lynch deemed to be
reasonably similar to FHP and PacifiCare, respectively; (vii) compared the
proposed financial terms of the transactions contemplated by the Reorganization
Agreement with the financial terms of certain other mergers and acquisitions
which Merrill Lynch deemed to be relevant; (viii) reviewed the Original
Reorganization Agreement; (ix) reviewed a draft (dated July 31, 1996) of Article
IV.C of the proposed Restated Certificate; (x) considered certain pro forma
financial effects of the Mergers; and (xi) reviewed such other financial studies
and analyses and performed such other investigations and took into account such
other matters as Merrill Lynch deemed necessary, including its assessment of
general economic, market and monetary conditions. Merrill Lynch reviewed the
First Amended Reorganization Agreement and the Reorganization Agreement,
including in each case the revised proposed Restated Certificate, and determined
that the changes reflected in those documents did not require any modification
to the Merrill Lynch Opinion. Merrill Lynch so advised the FHP Board of
Directors in writing on September 17, 1996 and November 13, 1996, respectively.
In preparing the Merrill Lynch Opinion, Merrill Lynch relied on the accuracy
and completeness of all information supplied or otherwise made available to it
by FHP and PacifiCare, and Merrill Lynch did not independently verify such
information or undertake an independent appraisal of the assets or liabilities
of FHP or PacifiCare. Merrill Lynch evaluated FHP on a consolidated basis and
did not perform a separate valuation analysis of Talbert on a stand-alone basis
or attribute any value to the Talbert Rights. With respect to the financial
forecasts furnished by FHP and PacifiCare, Merrill Lynch assumed that they were
reasonably prepared and reflected the best currently available estimates and
judgment of FHP's or PacifiCare's management as to the expected future financial
performance of FHP or PacifiCare, as the case may be. In addition, Merrill Lynch
assumed that the Mergers would qualify as transactions under Section 351.
Merrill Lynch did not express any opinion as to prices at which the PacifiCare
Holding Class A Common, the PacifiCare Holding Class B Common or the PacifiCare
Holding Preferred will trade following consummation of the Mergers. The Merrill
Lynch Opinion is necessarily based on market, economic and other conditions as
they existed on August 4, 1996.
47
<PAGE>
The following is a summary of the analyses performed by Merrill Lynch in
connection with its presentation to the FHP Board of Directors on August 3, 1996
and the subsequent delivery of the Merrill Lynch Opinion:
ANALYSIS OF IMPLIED MULTIPLES PAID IN THE FHP MERGER. Based on an exchange
ratio of 0.258 and a $68.00 stock price for the PacifiCare Class B Common Stock,
the offer value for the FHP Merger is $2.158 billion (defined as the number of
shares of FHP Common Stock on a fully diluted basis multiplied by $35.00, the
assumed value of the FHP Merger consideration per share of FHP Common Stock),
representing a multiple to FHP management's estimated calendar year 1996 and
fiscal year 1997 projected earnings per share of FHP Common Stock of 21.5x and
19.0x, respectively, or 22.4x and 20.2x analysts' estimated calendar year 1996
and fiscal year 1997 projected EPS. Based on FHP's 1.91 million members at June
30, 1996, the FHP Merger represents a value per member of $1,129.8. Based on an
assumed stock price of $68 per share of PacifiCare Class B Common Stock and the
closing trading price for FHP Common Stock of $26.13 as of July 31, 1996, the
FHP Merger represents a 33.9% premium to such FHP stock price.
ANALYSIS OF SELECTED COMPARABLE PUBLICLY TRADED COMPANIES. Merrill Lynch
compared certain financial information for FHP with the corresponding publicly
available financial information of certain other companies that Merrill Lynch
deemed to be reasonably similar to FHP. In this portion of its analysis, Merrill
Lynch compared certain financial information for nine managed care companies,
four of which, PacifiCare, WellPoint Health Networks, Inc., Health Systems
International Inc. and Foundation Health Corporation, have a dominantly
California presence (the "California Comparable Companies"), and the remaining
five of which, Oxford Health Plans Inc., United HealthCare Corporation, Humana
Inc., Healthsource, Inc. and Aetna Inc., are based predominantly outside of
California (together with the California Comparable Companies, the "Comparable
Companies").
Merrill Lynch compared the market values (defined as the product of primary
common shares outstanding and current per share price) of the Comparable
Companies as a multiple of, among other things, estimated 1996 and 1997 net
income. An analysis of the multiples of market values to estimated 1996 net
income for the Comparable Companies, excluding certain anomalous results,
yielded a mean of 10.7x and a median of 10.0x for the California Comparable
Companies and a mean of 12.7x and a median of 13.0x for all the Comparable
Companies. A similar analysis of 1997 estimated net income yielded a mean of
9.2x and a median of 8.6x for the California Comparable Companies and a mean of
10.4x and a median of 10.2x for all the Comparable Companies. In addition,
Merrill Lynch compared the ratio of the current 1997 price/earnings ratio to
analysts' estimated five-year EPS growth rate for each of the Comparable
Companies. Such analysis yielded a mean of 56.9% and a median of 59.5% for the
California Comparable Companies and a mean of 58.1% and a median of 64.1% for
all the Comparable Companies. Based upon the above, Merrill Lynch obtained an
equity value of FHP Common Stock of $21.00 to $27.00 per share.
ANALYSIS OF SELECTED COMPARABLE ACQUISITION TRANSACTIONS. Merrill Lynch
reviewed certain publicly available information regarding eight selected
business combinations announced since May 1993 involving managed care companies
(collectively, the "Comparable Transactions"). The Comparable Transactions, in
reverse chronological order of public announcement and listed as
acquiror/target, were: Aetna Inc./US Healthcare Corporation; United HealthCare
Corporation/Healthwise of America; WellPoint Health Networks, Inc./Health
Systems International, Inc. (which was terminated); United HealthCare
Corporation/Gencare Health Services, Inc.; Foundation Health
Corporation/Intergroup Health Corporation; United HealthCare Corporation/Ramsay
HMO, Inc.; FHP/TakeCare, Inc.; and United HealthCare Corporation/HMO America
Inc.
Merrill Lynch calculated for each of the Comparable Transactions: (i) the
multiples of offer value to (a) the last twelve months ("LTM") EPS and (b) the
twelve-month forward EPS; and (ii) the ratio of the offer value multiple of the
twelve-month forward EPS to the estimated five-year EPS growth rate. Based upon
its analysis of such multiples for the most relevant Comparable Transactions,
Merrill Lynch used multiple ranges of 23x to 29x, 18x to 22x and 1.1x to 1.3x,
respectively, for its review of
48
<PAGE>
FHP's estimated fiscal year 1996 EPS, fiscal year 1997 EPS and projected
five-year EPS growth rate. Applying such multiple ranges, Merrill Lynch obtained
an equity value of FHP Common Stock of $32.00 to $38.00 per share.
DISCOUNTED CASH FLOW ANALYSIS. Merrill Lynch performed a discounted cash
flow analysis of FHP based upon estimates of projected financial performance
prepared by FHP for the fiscal years 1997 through 2001. Utilizing these
projections, Merrill Lynch calculated a range of FHP equity values based upon
the discounted net present value of FHP's five-year stream of projected
unlevered free cash flow and a projected fiscal year 2001 terminal value. In
performing this analysis, Merrill Lynch utilized discount rates reflecting FHP's
weighted average costs of capital ranging from 13.0% to 15.0% and terminal value
multiples of fiscal year 2001 net income ranging from 12.0x to 16.0x. For
purposes of its analysis, Merrill Lynch assumed FHP had a net debt of $81.0
million consisting of total debt less working capital less long-term marketable
securities (based on estimated June 30, 1996 balance sheet) less option
proceeds. Based on such analysis, Merrill Lynch obtained an equity value of FHP
Common Stock of $28.50 to $39.00 per share.
PRO FORMA ANALYSIS. Merrill Lynch analyzed certain pro forma effects of the
Mergers on PacifiCare's EPS. In conducting its analysis, Merrill Lynch relied
upon financial forecasts provided by FHP and PacifiCare for the fiscal years
1997 through 2001. Merrill Lynch presented to the FHP Board of Directors several
pro forma analyses, including one that assumed realization of 100% of the
synergies estimated by FHP's management (the "FHP Analysis"), one that assumed
realization of 50% of the synergies estimated by FHP's management (the "FHP 50%
Analysis") and one that assumed realization of 100% of the synergies estimated
by PacifiCare's management (the "PacifiCare Analysis"). Based upon such
financial forecasts, Merrill Lynch calculated that under the FHP Analysis and
the FHP 50% Analysis, the Mergers would be 3.4% and 10.9% dilutive,
respectively, to PacifiCare's fully diluted EPS for the fiscal year 1997 and
would be from 13.6% to 19.1% and 2.5% to 10.7%, respectively, accretive to
PacifiCare's fully diluted EPS for the fiscal years 1998 to 2001. Based upon
such financial forecasts, Merrill Lynch also calculated that under the
PacifiCare Analysis, the Mergers would be from 1.6% to 22.6% accretive to
PacifiCare's fully diluted EPS for the fiscal years 1997 through 2001.
EXCHANGE RATIO ANALYSIS. Merrill Lynch reviewed the implied exchange ratio
based on historical prices of FHP Common Stock and the PacifiCare Class B Common
Stock over the period from July 1993 to July 1996 and compared the one-year,
two-year and three-year average implied exchange ratios of 0.1814x, 0.1896x and
0.223x, respectively, to the exchange ratio for the Mergers (prior to any
adjustment) of 0.258x. Merrill Lynch also calculated the range of implied
exchange ratios by dividing the discounted cash flow per share of FHP Common
Stock using the discounted cash flow analysis set forth above as adjusted to
credit FHP stockholders with certain synergies. This analysis resulted in
theoretical exchange ratios of 0.181x to 0.191x, before giving effect to any
assumed synergies; 0.211x to 0.222x, giving FHP stockholders credit for all
synergies contemplated by the FHP 50% Analysis; 0.240x to 0.253x, giving FHP
stockholders credit for all synergies contemplated by the FHP Analysis; and
0.253x to 0.266x, giving FHP stockholders credit for all synergies contemplated
by the PacifiCare Analysis. In addition, Merrill Lynch calculated the relative
contributions to pro forma combined revenue, earnings before interest and tax
("EBIT") and net income, giving effect to the Mergers, from each of FHP and
PacifiCare for the twelve months ending September 30, 1996, and compared such
contributions to the percentage of the economic value FHP stockholders will
receive in the combined Mergers. This analysis resulted in FHP's contributions
to the pro forma combined revenue, EBIT and net income of 31.4%, 29.2% and
25.1%, respectively, for such twelve-month period compared to ownership of 33.3%
of the combined equity.
The summary set forth above does not purport to be a complete description of
the analyses performed by Merrill Lynch in arriving at the Merrill Lynch
Opinion. Arriving at a fairness opinion is a complex process involving
subjective judgments and is not necessarily susceptible to partial analysis or
summary description. In addition, Merrill Lynch believes that its analyses must
be considered as a whole and that selecting portions of such analyses and of the
factors considered therein, without considering all such factors and analyses,
could create an incomplete view of the analyses and the processes underlying the
Merrill Lynch Opinion. The matters considered by Merrill Lynch in its
49
<PAGE>
analyses are based on numerous macroeconomic, operating and financial
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of FHP or
PacifiCare and involve the application of complex methodologies and educated
judgment. Any estimates incorporated in the analyses performed by Merrill Lynch
are not necessarily indicative of actual past or future results or values, which
may be significantly more or less favorable than such estimates. Estimated
values do not purport to be appraisals and do not necessarily reflect the prices
at which businesses or companies may be sold in the future, and such estimates
are inherently subject to uncertainty. With respect to the analyses of selected
Comparable Companies or Comparable Transactions summarized above, no public
company or transaction utilized as a comparison is identical to FHP or
PacifiCare or the Mergers, and such analyses necessarily involve complex
considerations. Accordingly, the analysis of publicly traded Comparable
Companies and Comparable Transactions is not mathematical; rather it involves
complex considerations and judgments concerning the differences in financial and
operating characteristics of the companies and transactions and other factors
that could affect the companies concerned. None of the analyses performed by
Merrill Lynch was assigned a greater significance by Merrill Lynch than any
other.
The FHP Board of Directors selected Merrill Lynch to act as its financial
advisor on the basis of Merrill Lynch's reputation as an internationally
recognized investment banking firm with substantial expertise in transactions
similar to the Mergers. Merrill Lynch is continually engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions and
for other purposes.
Merrill Lynch has from time to time provided various investment banking and
other financial advisory services to FHP, and has received customary fees for
the rendering of such services. In the ordinary course of its business, Merrill
Lynch and its affiliates may actively trade the securities of FHP for its or
their own accounts and for the accounts of its customers and, accordingly, at
any time hold a long or short position in such securities.
FHP has agreed to pay Merrill Lynch fees as follows: (i) a cash fee of
$250,000, which was payable on the date of the letter agreement; (ii) an
additional cash fee of $750,000 payable on the delivery of the Merrill Lynch
Opinion; and (iii) if, while Merrill Lynch is retained by FHP, FHP consummates
or enters into an agreement which leads to, a Business Combination (defined as
any merger, consolidation, reorganization, asset sale or other business
combination pursuant to which the business of FHP is combined with that of one
or more purchasers, including, without limitation, the acquisition, directly or
indirectly, by one or more purchasers of control of FHP through a proxy contest,
the acquisition of more than 50% of the voting capital shares of FHP or
otherwise) or within one year after the termination of the letter agreement, a
Business Combination is consummated with one of the potential purchasers listed
in the letter agreement (or any potential purchasers subsequently added by
mutual agreement), then an additional fee of $6,500,000, payable upon the
closing of such Business Combination (less any fees paid previously by FHP to
Merrill Lynch with respect to the separation of Talbert). In such letter, FHP
also agreed to reimburse Merrill Lynch for certain of its reasonable out-
of-pocket expenses and to indemnify Merrill Lynch against certain liabilities
related to or arising out of any transaction contemplated by the letter
agreement.
FINANCING OF FHP MERGER CONSIDERATION
It is currently anticipated that all of the approximately $1.0 billion
required to pay the Cash Consideration pursuant to the FHP Merger and fees and
expenses related to the Mergers will be funded out of borrowings under a new
PacifiCare Holding credit facility.
In connection with the Mergers, PacifiCare Holding has entered into a Credit
Agreement, dated as of October 31, 1996 (the "Credit Agreement") with Bank of
America, as Agent ("Agent"), and a syndicate of financial institutions
(collectively, "Banks") whereby the Banks are obligated to provide a $1.5
billion credit facility (the "Credit Facility") to PacifiCare Holding. Funding
under the Credit Facility is subject to the satisfaction of a variety of
customary borrowing conditions, as described below. PacifiCare's obligation to
consummate the FHP Merger is not subject to obtaining the required financing.
50
<PAGE>
The following summary of the Credit Agreement does not purport to be
complete and is qualified in its entirety by reference to the Credit Agreement,
copies of which have been filed as exhibits to the Registration Statement of
which this Joint Proxy Statement/Prospectus is a part and are incorporated by
reference herein.
The Credit Agreement provides for a five-year, unsecured, reducing revolving
credit facility in an aggregate amount of $1.5 billion with FHP and PacifiCare
providing guarantees under the Credit Facility. PacifiCare Holding may borrow
the full amount of the Credit Facility to fund a portion of the Cash
Consideration and to pay a portion of the fees and expenses incurred in
connection with the Mergers. Thereafter, the Credit Facility will remain
available for general corporate purposes. On the dates set forth below, the
aggregate commitment of the Banks, and maximum amount of loans permitted to be
outstanding, under the Credit Facility will be reduced to the corresponding
amounts:
<TABLE>
<CAPTION>
COMMITMENT REDUCTION DATE AGGREGATE BANK COMMITMENT
- -------------------------- --------------------------
<S> <C>
January 1, 1999 $1,400,000,000
July 1, 1999 $1,300,000,000
January 1, 2000 $1,200,000,000
July 1, 2000 $1,100,000,000
January 1, 2001 $950,000,000
July 1, 2001 $800,000,000
January 1, 2002 $0
</TABLE>
Interest on the borrowings under the Credit Facility will be determined
based on the type of borrowing selected by PacifiCare Holding from time to time.
The three borrowing options are: LIBOR, base rate and competitive bid. Interest
on LIBOR borrowings will be LIBOR for one, two, three, six, or, to the extent
available to all Banks, 12 months, plus the applicable spread. In addition,
pursuant to the competitive bid option, PacifiCare Holding may request the Agent
to solicit competitive bids from the Banks priced at either a margin above or
below LIBOR or at an absolute interest rate. Each Bank will bid at its own
discretion for amounts up to the total amount of the unused commitments and
PacifiCare Holding will be under no obligation to accept any of the bids. The
calculation of the applicable spread will be based on either of two criteria
under a pricing grid, at the option of PacifiCare Holding. Under one
alternative, pricing is based on the ratio of PacifiCare Holding's funded debt
to adjusted EBITDA. Under the other alternative, pricing is based on PacifiCare
Holding's, PacifiCare or FHP's senior unsecured debt ratings as determined by
Standard and Poor's Corporation and Moody's Investors Service, Inc. Under the
pricing grid, the applicable spread ranges from 0.165% to 0.525% per annum over
LIBOR.
A facility fee is payable and accrues from the date of initial funding of
the Credit Facility. The amount of the facility fee varies based on the same
pricing grid and criteria described above and is payable on the full amount of
the Credit Facility, regardless of the amount drawn thereunder. Under the
pricing grid, the facility fee ranges from 0.085% to 0.225% per annum.
A commitment fee is payable from October 31, 1996 through the date of
initial funding under the Credit Facility. The commitment fee will accrue on the
full amount of the Credit Facility at a rate of 0.125% per annum from October
31, 1996 through January 3, 1997 and at a rate of 0.25% thereafter.
The Credit Agreement specifies that the Banks' obligation to effect the
closing of the Credit Facility is subject to conditions customary for financings
of this type, including among other things: (i) no material adverse change in
the financial condition, business operations or properties of PacifiCare and its
subsidiaries, taken as a whole, or FHP and its subsidiaries, taken as a whole;
(ii) no event of default existing under the loan documentation; (iii) no
material amendment of or waiver under any documents pertaining to the
Reorganization Agreement and the documents delivered and entered into in
connection therewith (the "FHP Acquisition Documents"); (iv) accuracy of all
representations and warranties under the FHP Acquisition Documents in all
material respects; (v) no litigation or judgment, order, injunction or other
restraint prohibiting or imposing materially adverse conditions
51
<PAGE>
upon the Mergers or the making of the loans, or performance by PacifiCare
Holding of its obligations, under the Credit Facility; (vi) termination of
PacifiCare's and FHP's existing revolving credit agreements; and (vii) receipt
of satisfactory opinions of counsel to PacifiCare and FHP.
The Credit Agreement includes conditions to borrowing customary for
financings of this type, including without limitation: (i) absence of material
adverse change of PacifiCare Holding and its subsidiaries on a consolidated
basis; (ii) absence of defaults; and (iii) accuracy of specified representations
and warranties.
The Credit Agreement contains representations and warranties which are usual
for financings of this type, including without limitation: (i) corporate
existence and power; (ii) corporate, stockholder and government authorization;
(iii) no violation or conflict with organizational documents, any law or
regulation or any agreement; (iv) compliance with laws and regulations; (v)
enforceability of the FHP Acquisition Documents and loan documentation; (vi)
absence of material adverse change and material litigation; (vii) accuracy of
financial statements; (viii) compliance with Federal Reserve margin
requirements; (ix) taxes; (x) disclosure of capitalization, subsidiaries,
material agreements, properties and employee benefit plans; and (xi) absence of
material misstatements.
The Credit Agreement contains covenants which are usual for financings of
this type, including without limitation: (i) provision of financial statements
and information; (ii) limitations on PacifiCare's, FHP's and their subsidiaries'
lines of business; (iii) limitations on additional indebtedness; (iv)
limitations on fundamental changes, mergers, acquisitions, consolidations and
asset sales; (v) limitations on liens; (vi) limitations on prepayment of other
indebtedness; (vii) limitations on share repurchases, redemptions, dividends,
and distributions except for (a) the repurchase of up to $80 million of
PacifiCare Holding Class A Common, (b) the repurchase of up to $100 million of
PacifiCare Holding Class A Common or Class B Common, and (c) certain other
limited distributions; (viii) limitations on PacifiCare Holding's subsidiaries'
agreements with creditors restricting their ability to make distributions; and
(ix) limitations on investments.
The Credit Agreement contains the following financial covenants: (i) a
minimum net worth requirement; (ii) a fixed charge coverage ratio; and (iii) a
leverage ratio.
The Credit Agreement contains events of default which are usual for
financings of this type, including without limitation: (i) nonpayment of
principal, interest, fees or other amounts; (ii) violation of covenants; (iii)
material breach of representations or warranties; (iv) cross-default; (v)
bankruptcy or insolvency; (vi) certain ERISA events having a material adverse
effect; (vii) a change of control; (viii) certain events relating to compliance
with HMO regulations and actions by HMO regulators; (ix) loss of licenses or
permits having a material adverse effect; (x) certain undischarged judgments;
and (xi) defaults under the guaranties of PacifiCare and FHP.
It is anticipated that the indebtedness incurred through borrowings under
the proposed Credit Facility will be repaid from funds generated internally by
PacifiCare Holding and its subsidiaries and/ or from other sources which may
include, among other things, the proceeds of the private or public sale of
securities; however, no decisions have been made concerning the method
PacifiCare Holding will employ to repay such indebtedness.
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES; NO FRACTIONAL
SHARES
FHP. As soon as practicable after the Effective Time, a letter of
transmittal will be mailed to each holder of record of FHP Common Stock to be
used in forwarding certificates evidencing such shares for surrender and
exchange for certificates evidencing the shares of PacifiCare Holding Class A
Common and PacifiCare Holding Class B Common, together with the cash to which
such holder has become entitled. If the Series A Amendment is approved,
concurrent with the mailing of letters to holders of the FHP Common Stock, a
letter of transmittal will be mailed to each holder of FHP Preferred Stock. The
letter of transmittal is to be used in forwarding certificates evidencing such
shares for surrender (excluding certificates already surrendered pursuant to a
Form of Irrevocable Election) and in providing certain other information, and is
required to be properly executed and delivered to the Exchange Agent for any
such holder to receive certificates evidencing the shares of
52
<PAGE>
PacifiCare Holding Preferred and the cash to which such holder has become
entitled. If the Series A Amendment is not approved: (i) mailing of the letter
of transmittal to such holder may be delayed (except as to shares for which an
Irrevocable Election has been made) until the end of the period during which the
Special Conversion Rights may be exercised by such holder; or (ii) the letter of
transmittal may be included with the Conversion Notice. See "-- Merger
Consideration." After receipt of the applicable transmittal form, each holder of
certificates formerly representing shares of FHP Common Stock or FHP Preferred
Stock should surrender such certificates to the Exchange Agent (excluding
certificates already surrendered pursuant to a Form of Irrevocable Election),
together with a properly completed and duly executed transmittal form and such
other documents as may be reasonably required by the Exchange Agent. Each holder
will receive in exchange therefor certificates evidencing the whole number of
PacificCare Holding shares together with the cash to which such holder is
entitled. Such transmittal forms will be accompanied by instructions specifying
other details of the exchange. No fractional shares of PacifiCare Holding Class
A Common, PacifiCare Holding Class B Common or, if applicable, PacifiCare
Holding Preferred will be issued to holders of FHP Common Stock or FHP Preferred
Stock. Instead, cash equal in amount to the fraction of a share of PacifiCare
Holding Class A Common, PacifiCare Holding Class B Common or PacifiCare Holding
Preferred such holder is otherwise entitled to receive times the closing price
of such stock as quoted on the Nasdaq National Market on the first day of
trading after the Mergers become effective will be paid. The Talbert Rights into
which FHP Capital Stock is converted in part will be delivered separately after
the consummation of the Mergers.
FHP STOCKHOLDERS SHOULD NOT SURRENDER THEIR STOCK CERTIFICATES FOR EXCHANGE
UNTIL THEY RECEIVE A TRANSMITTAL FORM OR CONVERSION NOTICE UNLESS SURRENDERED
PURSUANT TO AN IRREVOCABLE ELECTION.
PACIFICARE. As soon as practicable after the Effective Time, a letter of
transmittal will be mailed to each holder of record of PacifiCare Class A Common
Stock and PacifiCare Class B Common Stock to be used in forwarding certificates
evidencing such shares for surrender and exchange for certificates evidencing
the shares of PacifiCare Holding Class A Common or PacifiCare Holding Class B
Common, as applicable, to which such holder has become entitled. After receipt
of the applicable transmittal form, each holder of certificates formerly
representing shares of PacifiCare Class A Common Stock or PacifiCare Class B
Common Stock should surrender such certificates to the Exchange Agent, together
with a properly completed and duly executed transmittal form and such documents
as may reasonably be required by the Exchange Agent. Each holder will receive in
exchange therefor certificates evidencing the whole number of shares of
PacifiCare Holding to which such holder is entitled. Such transmittal forms will
be accompanied by instructions specifying other details of the exchange.
PACIFICARE STOCKHOLDERS SHOULD NOT SURRENDER THEIR STOCK CERTIFICATES FOR
EXCHANGE UNTIL THEY RECEIVE A TRANSMITTAL FORM.
EFFECT ON CERTIFICATES. At the Effective Time, holders of certificates
representing shares of FHP Common Stock, FHP Preferred Stock, PacifiCare Class A
Common Stock and PacifiCare Class B Common Stock will cease to have any rights
as stockholders of FHP or PacifiCare, respectively, other than the right to
receive the consideration to which such holders are entitled pursuant to the
Reorganization Agreement, and the stock transfer books of FHP and PacifiCare
will be closed with respect to all shares of FHP Common Stock, FHP Preferred
Stock, PacifiCare Class A Common Stock and PacifiCare Class B Common Stock
outstanding immediately prior to the Effective Time. No further transfer of any
such shares of FHP Common Stock, FHP Preferred Stock, PacifiCare Class A Common
Stock or PacifiCare Class B Common Stock will thereafter be made on such stock
transfer books. If, after the Effective Time, a valid certificate previously
representing any of such shares of FHP Common Stock, FHP Preferred Stock,
PacifiCare Class A Common Stock or PacifiCare Class B Common Stock (an "Old
Stock Certificate") is presented to the Exchange Agent or to FHP or PacifiCare,
as applicable, such stock certificate will be canceled and exchanged as provided
above.
DIVIDENDS. No dividends or other distributions declared or made with
respect to PacifiCare Holding Class A Common, PacifiCare Holding Class B Common
or, if applicable, PacifiCare Holding
53
<PAGE>
Preferred, with a record date after the Effective Time shall be paid to the
holder of any unsurrendered stock certificate. No cash payment shall be paid to
any such holder, until such holder surrenders such stock certificate in
accordance with the foregoing.
TALBERT RIGHTS OFFERING
RIGHTS OFFERING
BASIC SUBSCRIPTION PRIVILEGE. Upon the FHP Merger, shares of FHP Common
Stock and FHP Preferred Stock outstanding immediately before the Effective Time
(the "Talbert Rights Record Date") will be converted in part into the Talbert
Rights. Based upon current expectations concerning the number of shares of FHP
Common Stock that will be outstanding as of the Talbert Rights Record Date, FHP
Stockholders are expected to receive one Talbert Right for each 21.34381 shares
of FHP Common Stock and one Talbert Right for each 26.46474 shares of FHP
Preferred Stock held on the Talbert Rights Record Date. No fractional Talbert
Rights will be issued. The Talbert Rights will be evidenced by transferable
subscription certificates. Each Talbert Right will entitle the holder to
purchase one share of common stock of TMMHC (or, if TMMC and THSC are not
acquired by TMMHC, TMMC) ("Talbert Common Stock") for $21.50 per share (the
"Subscription Price"). Holders of Talbert Rights are entitled to subscribe for
all, or any whole number of, the shares of Talbert Common Stock underlying their
Talbert Rights (the "Basic Subscription Privilege").
ADDITIONAL SUBSCRIPTION PRIVILEGE. Each holder of Talbert Rights who
subscribes in full for all shares of Talbert Common Stock that such person is
entitled to purchase pursuant to the Basic Subscription Privilege will be
entitled to purchase additional shares of Talbert Common Stock at the
Subscription Price from any unsubscribed shares remaining after the exercise,
sale or expiration of all Basic Subscription Privileges (the "Additional
Subscription Privilege"). However, if the total number of shares of Talbert
Common Stock subscribed for pursuant to the Basic Subscription Privilege and the
Additional Subscription Privilege exceeds the total number of shares underlying
the Talbert Rights, the number of shares available for subscription pursuant to
the Additional Subscription Privilege will be allocated, on a pro rata basis, to
the nearest whole share, among those exercising the Additional Subscription
Privilege on the basis of their relative subscriptions pursuant to the
Additional Subscription Privilege.
EXERCISE CAP. The Talbert Rights may not be exercised to the extent that
the holder would as a result of the exercise become the beneficial owner of more
than 8% of the shares of Talbert Common Stock outstanding. However, those FHP
stockholders who were the beneficial owners of FHP Common Stock (on an
as-if-converted basis) in excess of 8% of the outstanding shares of FHP Common
Stock (on an as-if-converted basis) as of the Talbert Rights Record Date (the
"FHP Ownership Percentage") may exercise Talbert Rights to the extent that their
beneficial ownership of Talbert Common Stock does not exceed their FHP Ownership
Percentage.
PROSPECTUS. A preliminary prospectus with respect to the Talbert Rights
Offering will be delivered to holders of FHP Capital Stock prior to the date of
the FHP Meeting. The offering of the Talbert Rights will be made only by means
of a separate prospectus. Holders of FHP Capital Stock are advised to carefully
review the preliminary prospectus and the prospectus relating to the Talbert
Rights Offering prior to deciding whether or not to exercise such rights.
Exercise of the Talbert Rights involves substantial risk of loss.
DELIVERY DATE; SUBSCRIPTION EXPIRATION DATE. The Talbert Rights Offering
will commence promptly after the consummation of the Mergers (or as soon
thereafter as legally permissible). The Talbert Rights will expire at 5:00 p.m.,
Eastern Standard Time, on the 30th day after the commencement of such offering
(the "Expiration Date"). After the Expiration Date, the Talbert Rights will be
void and valueless. TMMHC (or, if TMMC and THSC are not acquired by TMMHC, TMMC)
is not obligated to honor any subscriptions received after the Expiration Date,
regardless of when such subscriptions were sent.
54
<PAGE>
SUBSCRIPTION PROCEDURE. Holders of Talbert Rights may exercise them by
delivering the related subscription certificate (which governs both the Basic
Subscription Privilege and the Additional Subscription Privilege) properly
completed and accompanied by full payment for all shares of Talbert Common Stock
subscribed for to AST on or before the Expiration Date.
PURCHASE, SALE OR TRANSFER OF RIGHTS. The Talbert Rights will be freely
transferable and may be purchased or sold through ordinary investment channels,
including brokers. Application will be made for the quotation of the Talbert
Rights on the Nasdaq National Market.
PROCEEDS. If fully subscribed, the Talbert Rights Offering will result in
net proceeds of approximately $59.5 million.
BUSINESS OF TALBERT
RISK FACTORS. Investment in TMMHC or TMMC, as the case may be, through the
exercise of the Talbert Rights involves significant risks. FHP STOCKHOLDERS
SHOULD CAREFULLY REVIEW THE PROSPECTUS RELATED TO THE TALBERT RIGHTS OFFERING,
INCLUDING THE RISK FACTORS IDENTIFIED THEREIN, BEFORE DECIDING WHETHER OR NOT TO
EXERCISE THE TALBERT RIGHTS.
BUSINESS OF TALBERT. Talbert organizes and manages physician and dentist
practice groups that contract with HMOs and other payors to provide health care
services to their members. As of September 30, 1996, Talbert had approximately
360 affiliated physicians and 80 dentists providing care in 54 medical centers
located in Southern California, Utah, Arizona, New Mexico and Nevada. Through
its affiliated medical groups, Talbert managed over 300,000 capitated enrollees
as of September 30, 1996.
Under a managed care system, HMOs arrange for the provision of health care
for their members, either by employing physicians and other health care
professionals directly or by contracting with independent groups. HMOs often use
Capitation Fees to control costs and minimize risk. However, most physicians
practice individually or in small groups that usually do not have the
administrative capacity, risk management expertise or capital to invest in
sophisticated information systems necessary to manage capitation arrangements
with multiple HMOs.
Physician practice management companies ("PPMCs") such as TMMC have evolved
recently to provide these services, freeing physicians to focus on the practice
of medicine. TMMC offers a broad range of practice management services to its
affiliated medical groups, including (i) provider contract negotiation and
administration, (ii) Medicare risk management, (iii) management information
systems (development, implementation and maintenance), (iv) medical management
(claims administration, utilization and case management, quality assurance and
risk management, and physician credentialing and recruitment), and (v) support
services (including nursing, reception, scheduling, billing, collection and
accounting). Ancillary clinical services (including pharmacy, radiology,
optometry, laboratory, home health, hospice, rehabilitation and physical
therapy) are provided by THSC. TMMC provides these services under a management
services agreement with an affiliated medical group, and in return TMMC is
reimbursed for certain clinic operations expenses and receives a management fee
based on the group's revenues after deducting certain reimbursed clinic
operations expenses (except in California, where the management fee is based on
the group's gross revenues). TMMC currently has management services agreements
with four physician practice groups and six dental practice groups and directly
operates one physician practice group in New Mexico, all of which were formerly
associated with FHP Staff Model HMO operations. Over time, Talbert intends to
seek acquisitions or affiliations with additional practice groups in new and
existing markets.
TMMC also represents its managed medical groups in obtaining and negotiating
provider agreements with HMOs and other payors. Under a typical provider
contract, the medical group is responsible for managing all physician-related
covered medical care for each enrollee in exchange for Capitation Fees. Provider
agreements generally include shared risk arrangements and other financial
incentives designed to encourage the provision of high-quality, cost-effective
health care. Talbert's affiliated medical groups and TMMC currently have a total
of 11 provider agreements with FHP, which accounted for nearly 100% of Talbert's
revenues for the nine months ended September 30,
55
<PAGE>
1996. TMMC has entered into provider agreements with a number of other payors on
behalf of its affiliated medical groups, and expects to further diversify its
payor base following its separation from FHP.
The following table sets forth, as of September 30, 1996, the number of
medical centers, affiliated physicians and capitated enrollees for each of the
states in which Talbert does business:
<TABLE>
<CAPTION>
MEDICAL AFFILIATED CAPITATED
CENTERS PHYSICIANS ENROLLEES
------------- ------------- ---------
<S> <C> <C> <C>
California.................................................. 26 206 132,463
Utah........................................................ 7 80 109,652
Arizona..................................................... 14 41 31,460
New Mexico.................................................. 5 27 25,504
Nevada...................................................... 2 6 4,706
--
--- ---------
Total..................................................... 54 360 303,785
</TABLE>
SEPARATION FROM FHP. TMMC and THSC have operated as subsidiaries of FHP,
providing practice management and ancillary clinical services to the medical
groups that formerly were part of FHP's Staff Model HMO operations and that
currently provide health care to approximately 15.7% of FHP's members. In July
1996, FHP determined to pursue a tax-free spin-off of TMMC and THSC in the
belief that they would be more attractive to other payors if they were not so
closely identified with FHP.
Soon after FHP's decision to spin off TMMC and THSC, FHP agreed to be
acquired by PacifiCare. FHP and PacifiCare have agreed to abandon the tax-free
spin-off of TMMC and THSC, and instead to proceed with the separation of TMMC
and THSC from FHP concurrent with the FHP Merger. To effect this separation, FHP
intends to sell its 92.25% equity interest in both TMMC and THSC to TMMHC at the
closing of the FHP Merger (the 'Talbert Acquisition"). In exchange, FHP will
receive rights to purchase 92.25% of TMMHC's Common Stock, or 2,767,500 shares,
plus a note (the "Note") for $59,501,250, the estimated proceeds of the Talbert
Rights Offering if fully subscribed. By virtue of the FHP Merger, shares of FHP
Common Stock and FHP Preferred Stock will be converted, in part, into the
Talbert Rights, which confer upon the holders, collectively, the right to
purchase 2,767,500 shares of TMMHC's Common Stock. TMMHC will sell to FHP any
shares of TMMHC Common Stock unsubscribed for in the Talbert Rights Offering in
exchange for cancellation of any remaining indebtedness under the Note. FHP and
TMMC may determine not to effect the separation of Talbert in this manner, in
which case the Talbert Rights would be rights to purchase FHP's interest in TMMC
(following its combination with THSC).
TMMHC or TMMC, as the case may be, and FHP will enter into a standstill
agreement with respect to any Talbert Common Stock held by FHP following the
completion of the Talbert Rights Offering (the "Standstill Agreement"). The
Standstill Agreement provides, among other provisions, that, if FHP holds 20% or
less of the outstanding Talbert Common Stock following the completion of the
Talbert Rights Offering, for a period of seven years, FHP: (i) will vote its
shares of Talbert Common Stock in accordance with the votes of the non-FHP
stockholders; (ii) will not acquire additional shares of Talbert Common Stock;
(iii) will be subject to certain restrictions with respect to its ability to
solicit proxies, make acquisition proposals, become a member of a "group" (as
defined in the federal securities laws), or otherwise use its holdings of
Talbert Common Stock to seek to exercise control over the management of TMMHC or
TMMC, as the case may be; and (iv) will be entitled to certain shelf
registration rights and the right to participate in future registrations by
TMMHC or TMMC, as the case may be. These provisions, among others, will not
apply if FHP holds more than 20% of the Talbert Common Stock following the
completion of the Talbert Rights Offering.
TMMC will continue to provide practice management services to the Talbert
medical and dental practice groups. The Talbert medical and dental practice
groups will continue to provide care to enrolled members of FHP under their
existing provider agreements until the Effective Time. New provider agreements
covering FHP members will take effect at the Effective Time. These new provider
agreements do not provide the subsidies included in the existing provider
agreements with
56
<PAGE>
FHP. FHP will provide certain administrative services to TMMC on an interim
basis. FHP also will continue to lease to TMMC certain medical center facilities
and equipment. Prior to the Talbert Acquisition, TMMHC or TMMC, as the case may
be, will receive, in connection with the FHP Merger, a capital contribution
sufficient to increase its net worth to approximately $60 million (the "Capital
Contribution"). The amount of the Capital Contribution is currently anticipated
to be approximately $70 million.
PRINCIPAL STOCKHOLDERS OF TMMHC AND TMMC. TMMHC's Certificate of
Incorporation provides that TMMHC may issue up to 15 million shares of Talbert
Common Stock, and 1.2 million shares of preferred stock, par value $0.01 per
share (the "Talbert Preferred Stock"). Prior to the Talbert Rights Offering,
there will be 232,500 shares of TMMHC Common Stock and no shares of TMMHC
Preferred Stock issued and outstanding. Jack D. Massimino, the President and
Chief Executive Officer of TMMHC, will hold 150,000 shares and the remaining
82,500 shares will be held by a group of 11 other FHP and Talbert managers,
directors and former employees (collectively with Mr. Massimino, the "Management
Investors"). The shares held by the Management Investors are restricted, and
will not be available for purchase in the Talbert Rights Offering. A total of
180,000 shares have been reserved for options issuable to directors, employees,
agents and consultants (5.7% on a fully diluted basis). The Board of Directors
of Talbert has authorized the grant of additional options, subject to approval
by PacifiCare, to purchase in the aggregate approximately 40,000 shares to
certain officers and employees of Talbert (including Mr. Massimino and Ms.
Austin) who will forfeit unvested options in FHP in connection with the Talbert
Rights Offering. As a result of the Talbert Acquisition, FHP will acquire rights
to purchase another 2,767,500 shares, or 92.25%, of the outstanding TMMHC Common
Stock. In the event TMMHC does not acquire FHP's interest in TMMC and THSC, the
Talbert Rights will relate to FHP's interest in TMMC. In such event, the capital
structure of, and the stockholdings of Management Investors in, TMMC will be
substantially identical to TMMHC.
57
<PAGE>
TALBERT SUMMARY FINANCIAL INFORMATION.
The following selected historical financial information for the nine months
ended September 30, 1996 are derived from the unaudited combined financial
statements of Talbert.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1996
------------------
<S> <C>
(IN THOUSANDS)
INCOME STATEMENT DATA:
Revenue (1)(2)................................................................................ $ 351,235
Expenses:
Affiliated medical services................................................................. 103,504
Purchased medical services.................................................................. 85,851
Dental services............................................................................. 20,443
Optometry, pharmacy and other primary health care services.................................. 80,181
Clinic operations........................................................................... 45,142
----------
Total cost of health care................................................................. 335,121
Marketing, general and administrative (3)................................................... 19,622
----------
Operating loss................................................................................ (3,508)
Interest income............................................................................... 1,199
Interest expense.............................................................................. (6,504)
----------
Loss before income taxes...................................................................... (8,813)
Benefit for income taxes...................................................................... 3,601
----------
Net loss...................................................................................... $ (5,212)
----------
----------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------
<S> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital............................................................................... $ (29,672)
Total assets.................................................................................. 146,869
Long-term obligations......................................................................... 76,071
Stockholders' deficit (4)..................................................................... (5,112)
</TABLE>
- ------------------------
(1) Revenue is derived from prepaid Capitation Fees for ambulatory services,
plus patient copayments and fee-for service and, for the nine months ended
September 30, 1996, hospital incentive funds. Talbert did not incur any
hospital risk for the period presented.
(2) Nearly 100% of revenue was received from FHP. Revenue from FHP is capitated
by contract, which capitation rates have been subsidized by FHP. New
Capitation Contracts effective upon the Mergers, have been signed. The new
Capitation Contracts do not provide such subsidies.
(3) Includes cost of information system services, general administrative and
other corporate services provided by FHP.
(4) Does not reflect the Capital Contribution that will occur just prior to the
Effective Time that will result in stockholders' equity being approximately
$60 million.
REGULATORY MATTERS
STATE REGULATORY APPROVAL. HMOs and insurance companies are closely
regulated by the individual states or territories in which they operate.
Material modifications to the operational structure, financing, ownership or
other fundamental aspects of an HMO or an insurance company trigger state
regulatory oversight processes, which range from a requirement of notice to
state regulatory agencies to a formal review and approval process. In those
jurisdictions with a formal review and approval process, the regulatory agencies
may approve the material modification, approve it with conditions or deny
approval. Conditional approval may require changes in planned operations or
structure. Denial
58
<PAGE>
of approval would effectively block the material change. PacifiCare and FHP
anticipate that notice or approval will be required in most of the jurisdictions
in which PacifiCare Holding's regulated subsidiaries will operate following the
Mergers. The specific requirements and the scope of any regulatory review are
anticipated to vary significantly among states. FHP, through its subsidiaries,
operates HMOs and/or insurance companies in Arizona, California, Colorado,
Illinois, Indiana, Kentucky, New Mexico, Nevada, Ohio, Texas, Utah and Guam.
PacifiCare, through its subsidiaries, operates HMOs in California, Florida,
Oklahoma, Oregon, Texas and Washington. In addition, PacifiCare has a life and
health insurance company which is licensed to operate in 37 states and the
District of Columbia. Although requirements vary by state, regulatory review of
the Mergers (where required) will be based on, among other factors: (i)
continued compliance, after the Mergers, with requirements for licensure of HMOs
or insurance companies; (ii) effects on competition; (iii) the financial
condition of the HMO or insurance company after the Mergers; (iv) plans or
proposals for changes in business, corporate structure and management; (v)
competence, experience and integrity of those persons controlling the HMOs or
insurance company's operations; and (vi) whether the Mergers would be hazardous
or prejudicial to those buying health care coverage.
PacifiCare and FHP have filed applications with the regulatory agencies of
all applicable states seeking orders granting regulatory approval. PacifiCare
and FHP expect that required regulatory review will be completed by all states
by the end of the fourth quarter of calendar 1996, although there can be no
assurance that all state regulatory agencies will issue final orders by such
time. Further, there can be no assurance that all required approvals will be
granted, either with or without significant conditions. Affected persons, as
determined by a state regulatory agency, may be able to seek to participate in
proceedings on the Mergers. Although procedures vary by state, orders of state
regulatory agencies may be appealed by certain persons and the effectiveness of
an order could be stayed by the agency or a court while such an appeal is
pending. If approval is stayed, consummation of the Mergers could be delayed
pending such proceedings.
OTHER REGULATORY APPROVALS. Certain aspects of the Mergers will require
notification to, and filings with, various securities and other authorities in
certain states. The Mergers may also require notification to certain state and
federal government agencies that contract with PacifiCare's and FHP's HMOs.
Pursuant to the requirements of the HSR Act, each of PacifiCare, FHP,
PacifiCare Holding and UniHealth on August 22, 1996 filed Notification and
Report Forms and certain documentary attachments with respect to their
acquisitions of voting securities in the Mergers with the FTC and the Antitrust
Division. On September 20, 1996, the FTC issued a Second Request for additional
information and documentary material relevant to the Mergers to PacifiCare and
FHP which extends the waiting periods under the HSR Act and delays consummation
of the Mergers until 20 days after substantial compliance by each of PacifiCare
and FHP with the Second Request, unless the FTC grants early termination of the
HSR Act waiting period. PacifiCare and FHP are currently in the process of
responding to the Second Request. Additionally, the Attorney General of the
State of California has expressed interest in analyzing the potential effects of
the Mergers in California. PacifiCare and FHP have voluntarily agreed to provide
information to the California Attorney General under the terms of the National
Association of Attorneys General compact.
The FTC and the Antitrust Division frequently scrutinize the legality under
the antitrust laws of transactions such as the Mergers. At any time before or
after consummation of the Mergers, the FTC, the Antitrust Division, state
attorneys general or others could take action under antitrust laws with respect
to the Mergers, including seeking to enjoin consummation of the Mergers, to
cause the divestiture of significant assets of PacifiCare or FHP or their
subsidiaries or to impose conditions on PacifiCare Holding with respect to its
business operations. Based on information available to them, FHP and PacifiCare
do not believe that the consummation of the Mergers will result in the violation
of any antitrust laws. However, there can be no assurance that a challenge to
the Mergers on antitrust
59
<PAGE>
grounds will not be made, or, if such a challenge is made, PacifiCare or FHP
would prevail or would not be required to divest certain assets or to accept
certain conditions in order to consummate the Mergers.
ESTIMATED SYNERGIES
PacifiCare has announced publicly that it anticipates that the Mergers will
yield increased operating income primarily resulting from a combination of
reductions in marketing, general and administrative expenses and in medical
costs, the effects of new agreements with Talbert and the elimination of losses
from certain geographic areas. After an initial transition period, the annual
increase in operating income before tax (as compared, for each year, to the
estimated operating income of the two combined companies without synergies), net
of ongoing integration costs, is expected to be approximately $100 million,
increasing through fiscal 2000. The anticipated increase in operating income is
expected to be sufficient to offset the amortization of goodwill and other
intangibles related to the Mergers.
For fiscal 1997, marketing, general and administrative expense reductions
are currently anticipated to be approximately 60% of the total savings, with the
remainder coming primarily from medical cost improvements, the elimination of
losses from Talbert and the elimination of losses from certain geographic areas.
Reductions in marketing, general and administrative expenses are based upon the
combined company assessing its needs for overlapping functions such as
information systems, provider contracting systems, medical credentialing, sales
and marketing, and finance, accounting and other administrative functions,
particularly in overlapping markets and in corporate functions, and upon reduced
advertising and promotional expenditures. Expected reductions in medical costs
are based on assumptions that the combined company will improve provider
contracting and medical management strategies. The Talbert savings are expected
to result from the effects of new contracts entered into in advance of the
Talbert Rights Offering (see "-- Talbert Rights Offering").
After fiscal 1997, the improvements in operating income are expected to
result primarily from reductions in marketing, general and administrative
expenses, medical cost improvements and from savings from Talbert.
Expected income synergies do not include any normal business or other
revenue growth, or the effect of future general economic conditions.
THE ESTIMATES OF SYNERGIES SET FORTH ABOVE WERE NOT PREPARED WITH A VIEW TO
PUBLIC DISCLOSURE. THE ESTIMATES ARE BASED UPON A VARIETY OF ASSUMPTIONS
RELATING TO THE BUSINESS OF PACIFICARE AND FHP WHICH MAY NOT BE REALIZED AND ARE
SUBJECT TO SIGNIFICANT UNCERTAINTIES AND CONTINGENCIES. THE ESTIMATED SYNERGIES
ARE SUBJECT TO MATERIAL RISKS AND UNCERTAINTIES BEYOND THE CONTROL OF PACIFICARE
AND FHP. ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT THE ESTIMATED SYNERGIES
WILL BE REALIZED, AND ACTUAL SYNERGIES, IF ANY, MAY VARY MATERIALLY FROM THOSE
SHOWN. THE INCLUSION OF SUCH ESTIMATES HEREIN SHOULD NOT BE REGARDED AS AN
INDICATION THAT PACIFICARE, FHP, PACIFICARE HOLDING OR ANY OTHER PERSON
CONSIDERS THEM AN ACCURATE PREDICTION OF FUTURE EVENTS. NONE OF PACIFICARE, FHP,
OR PACIFICARE HOLDING OR ANY OTHER PERSON INTENDS PUBLICLY TO UPDATE OR
OTHERWISE PUBLICLY REVISE THE ESTIMATED SYNERGIES SET FORTH ABOVE EVEN IF
EXPERIENCE OR FUTURE CHANGES MAKE IT CLEAR THAT SUCH SYNERGIES WILL NOT BE
REALIZED.
THE INDEPENDENT ACCOUNTANTS FOR PACIFICARE, FHP AND PACIFICARE HOLDING HAVE
NOT EXAMINED OR COMPILED THESE ESTIMATES AND ACCORDINGLY DO NOT EXPRESS AN
OPINION OR ANY OTHER FORM OF ASSURANCE ON THEM.
THE ESTIMATED SYNERGIES SET FORTH ABOVE CONSTITUTE FORWARD LOOKING
INFORMATION. FOR A DISCUSSION OF FACTORS REGARDING SUCH FORWARD LOOKING
INFORMATION, SEE "-- FACTORS FOR FORWARD LOOKING INFORMATION."
60
<PAGE>
FACTORS FOR FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about themselves without fear of litigation so long as
those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the statement.
Accordingly, PacifiCare and FHP hereby identify the following important factors
which could cause PacifiCare's and FHP's actual results to differ materially
from any such results which might be projected, forecast, estimated or budgeted
by PacifiCare or FHP in forward-looking statements, including among other things
the estimated synergies:
(i) Heightened competition, including specifically the intensification
of price competition, the entry of new competitors and the formation of new
products by new and existing competitors, especially with respect to
Medicare products;
(ii) Adverse state and federal legislation and regulation, including
limitations on premium levels, increases in minimum capital and reserves and
other financial viability requirements, prohibition or limitation of
capitated arrangements or provider financial incentives, benefit mandates
(including mandatory length of stay and emergency room coverage),
limitations on the ability to manage care and utilization and any willing
provider or pharmacy laws;
(iii) Increases in medical costs, including increases in utilization and
costs of medical services and the effects of actions by competitors or
groups of providers;
(iv) Termination of provider contracts or renegotiation thereof at less
cost-effective rates or terms of payment;
(v) Price increases in pharmaceuticals, durable medical equipment and
other covered items;
(vi) Adverse actions of governmental payors, including unilateral
reduction of Medicare and Medicaid premiums payable to PacifiCare or FHP,
discontinuance of or limitations on governmentally-funded programs and
recovery by governmental payors of previously paid amounts;
(vii) Inability to increase premiums or prospective or retroactive
reductions to premium rates for federal employees notwithstanding increases
in medical costs due to competition, government regulation, or other
factors;
(viii) Loss of HMO members;
(ix) Failure to obtain new customers, retain existing customers or
reductions in force by existing customers;
(x) Governmental financial assessments or taxes to subsidize
uncompensated care, other insurance carriers, or academic medical
institutions;
(xi) Adverse publicity and news coverage;
(xii) Inability to carry out marketing and sales plans;
(xiii) Loss or retirement of key executives or key employees;
(xiv) Denial of accreditation by independent quality accrediting agencies;
(xv) Adverse results in ongoing OPM audits or in other reviews conducted
by federal or state agencies or health care purchasing cooperatives;
(xvi) Adverse results in significant litigation matters;
(xvii) Adverse regulatory determinations resulting in loss or limitations
of licensure, certification or contracts with governmental payors;
61
<PAGE>
(xviii) Higher service, administrative or general expenses occasioned by
the need for additional advertising, marketing, administrative, or
management information systems expenditures;
(xix) Changes in interest rates causing an increase in interest expense;
and
(xx) Increases by regulatory authorities of minimum capital, reserve and
other financial viability requirements.
In addition to the foregoing, the ability of PacifiCare Holding to realize
the increases in operating income referred to in "-- Estimated Synergies" is
also subject to the following additional uncertainties, among others:
(i) The ability to integrate the PacifiCare and FHP management and
information systems on a timely basis, if at all;
(ii) The ability to eliminate duplicative functions while maintaining
acceptable performance levels;
(iii) The fact that PacifiCare Holding will be subject to greater
operating leverage due to its higher levels of indebtedness relative to
PacifiCare and FHP as of the date of this Joint Proxy Statement/Prospectus;
(iv) The possibility that such integration will result in the loss of
providers, employers, members or key employees of PacifiCare Holding or its
subsidiaries; and
(v) The possibility that the Talbert Rights Offering will not be fully
subscribed, that FHP will continue to own a significant equity interest in
TMMHC or TMMC and that the synergies related to new contracts with Talbert
will not be realized.
In addition to the foregoing, all of the factors discussed in "Risk Factors"
may cause actual results to differ materially from any such results which might
be projected, forecast, estimated or budgeted by PacifiCare or FHP in
forward-looking statements.
Many of the foregoing factors discussed have been discussed in prior filings
of PacifiCare and FHP with the Commission. The foregoing review of factors
pursuant to the Private Litigation Securities Reform Act of 1995 should not be
construed as exhaustive.
STOCK OPTIONS; BENEFIT PLANS
FHP. Pursuant to the Reorganization Agreement, at least 20 days before the
date of the FHP Meeting, PacifiCare is obligated to notify FHP if it wishes to
provide a mechanism to cash out either vested or all outstanding FHP Options to
purchase FHP Common Stock. If PacifiCare wishes to provide such a mechanism,
PacifiCare shall offer (in a form reasonably acceptable to FHP) to each holder
of applicable FHP Options, the right to receive at the Effective Time, in return
for the cancellation of such option, an amount equal to: (i) the product of the
value of the consideration to be received for each share of FHP Common Stock
covered by the cash out multiplied by the number of shares of FHP Common Stock
with respect to which such option is exercisable, less (ii) the aggregate
exercise price of such options. The amount paid to any holder of FHP Options
following such payment and cancellation shall be net of applicable withholding
taxes. In calculating the consideration to be received for each share of FHP
Common Stock, the value of PacifiCare Holding Class A Common will be deemed to
be equal to the average closing price of PacifiCare Class A Common Stock, as
reported by the Wall Street Journal, during the 20 trading days ending the day
before the FHP Meeting (the "Average Closing Price of PacifiCare Class A Common
Stock"), the value of PacifiCare Class B Common Stock will be deemed to be equal
to the Average Closing Price of PacifiCare Class B Common Stock and the value of
the Talbert Rights will be deemed to be equal to the average of the closing
prices of such rights during the first five days of trading.
Pursuant to the Reorganization Agreement, PacifiCare Holding and PacifiCare
will cause each FHP Option not cashed out to be replaced, effective as of the
Effective Time, by a substitute option of
62
<PAGE>
PacifiCare Holding (an "Exchange Option") issued under a PacifiCare Holding
stock option plan that complies in all respects with the applicable requirements
of Rule 16b-3 promulgated under the Exchange Act. The per share exercise price
of an Exchange Option shall equal the quotient, rounding up to the nearest cent,
of (i) the per share exercise price of the corresponding FHP Option, less the
average closing price at which the Talbert Rights trade on their first five
trading days after issuance, as quoted in the Wall Street Journal, ("Talbert
Rights" for this purpose means the portion of a Talbert Right into which one
share of FHP Common Stock is converted in part) divided by (ii) the fraction of
a share of PacifiCare Holding Class B Common that the holder of such FHP Option
is entitled to purchase for each share of FHP Common Stock subject to such FHP
Option, as determined in the next sentence. For each share of FHP Common Stock
subject to such FHP Option, the Exchange Option shall entitle the holder thereof
to purchase a fraction of a share of PacifiCare Holding Class B Common equal to
the sum of (i) the fraction of a share of PacifiCare Holding Class B Common into
which one share of FHP Common Stock actually outstanding at the Effective Time
is converted pursuant to the Reorganization Agreement, plus (ii) the fraction of
a share of PacifiCare Holding Class B Common that could be purchased at the
Average Closing Price of PacifiCare Class B Common Stock for $17.50, plus (iii)
the fraction of a share of PacifiCare Holding Class B Common that could be
purchased at the Average Closing Price of PacifiCare Class B Common Stock for an
amount equal to the product of the fraction of a share of PacifiCare Holding
Class A Common into which one share of FHP Common Stock actually outstanding at
the Effective Time is converted pursuant to the Reorganization Agreement times
the Average Closing Price of PacifiCare Class A Common Stock. Any restriction on
the exercise of any FHP Option shall apply to the Exchange Option and the term,
exercisability, vesting schedule and other provisions of such FHP Option shall
similarly apply to the Exchange Option; provided, however, in the case of an
Exchange Option of a person who is an employee of FHP or one of its
subsidiaries, such Exchange Option shall provide that (i) any unvested shares,
the vesting of which depends on achievement by FHP of earnings or financial
performance of FHP for a fiscal year beginning on or after July 1, 1996, shall
instead vest no later than 25% per year over a four-year period, with the first
25% vesting on July 1, 1997; and (ii) if the holder of such Exchange Option is
terminated without cause after the Mergers and before the date as of which,
determined as of the date of execution of the Original Reorganization Agreement
and assuming no termination of any employee and the application of the vesting
schedule in immediately preceding clause (i) above, there would remain no more
than 100,000 shares of PacifiCare Holding Class B Common subject to such
Exchange Options in the aggregate that are not vested, such option shall
thereupon become fully vested; provided, further, that in the case of an
Exchange Option of a person who is an employee of Talbert, if the Talbert Rights
Offering is consummated in such a manner that Talbert would no longer be
considered a subsidiary of FHP for purposes of such Exchange Option, the
employment of such person by FHP or one of its subsidiaries shall be deemed
terminated for the convenience of FHP and the accelerated vesting rights set
forth in the foregoing proviso shall not apply; and provided, further, that in
the case of a holder of an Exchange Option who is a director of FHP or one of
its subsidiaries and who is not an employee of FHP or any of its subsidiaries,
the Exchange Option shall vest immediately when such holder no longer is serving
as a director of PacifiCare Holding or FHP or one of their subsidiaries. As soon
as practicable after the Effective Time, PacifiCare Holding shall file with the
Commission a registration statement on Form S-8 with respect to the shares of
PacifiCare Holding Class B Common underlying the Exchange Options and use its
reasonable best efforts to have such registration statement declared effective
under the Act. FHP may amend certain employment agreements to adjust the terms
and conditions for vesting of FHP Options held by employees party to such
agreements, provided the adjusted vesting is no more favorable than acceleration
upon a "Change of Control" as defined in such agreements and does not render
nondeductible to FHP any amounts under Section 280G of the Code, and further
provided any such adjustment shall neither increase other benefits or amounts
payable by FHP nor increase the number of shares or decrease the exercise price
under any FHP Option now outstanding. See "-- Interests of Certain Persons in
the Mergers" for a discussion of the acceleration of vesting of certain FHP
Options in connection with the FHP Merger.
63
<PAGE>
A description of the procedures to be followed by PacifiCare Holding and FHP
with respect to FHP's employee stock purchase plan and other employee benefits
is contained in Sections 4.08(c) and 4.08(d) of the Reorganization Agreement.
See Appendix A attached hereto.
PACIFICARE. At the Effective Time, each outstanding option to purchase
shares of PacifiCare Class B Common Stock (a "PacifiCare Class B Option") under
any of PacifiCare's stock options plans shall be canceled and PacifiCare Holding
shall issue in substitution therefor an option to purchase PacifiCare Holding
Class B Common (a "PacifiCare Holding Class B Substitute Option"). The exercise
price and the number of shares of PacifiCare Holding Class B Common subject to
each PacifiCare Holding Class B Substitute Option shall be identical to the
exercise price and the number of shares of PacifiCare Class B Common Stock
subject to the PacifiCare Class B Option that such PacifiCare Holding Class B
Substitute Option replaces, and each such PacifiCare Holding Class B Substitute
Option shall be subject to substantially all of the other terms and conditions
of the PacifiCare stock option plan it replaces. At the Effective Time, each
outstanding option to purchase shares of PacifiCare Class A Common Stock (a
"PacifiCare Class A Option") shall be converted into an option to purchase a
share of PacifiCare Holding Class A Common (a "PacifiCare Holding Class A
Substitute Option"). The exercise price and the number of shares of PacifiCare
Holding Class A Common subject to each PacifiCare Holding Class A Substitute
Option shall be identical to the exercise price and the number of shares of
PacifiCare Class A Common Stock subject to the PacifiCare Class A Option that
such PacifiCare Holding Class A Substitute Option replaces, and each such
PacifiCare Holding Class A Substitute Option shall be subject to substantially
all of the other terms and conditions of the PacifiCare Class A Option it
replaces. Under the terms of PacifiCare's option plans, the Mergers constitute a
change in control of PacifiCare which will cause all unvested options to vest at
the Effective Time. PacifiCare will seek waivers of this acceleration provision
from certain of its executive officers in exchange for the grant of additional
options. See "The Mergers and Related Transactions -- Interests of Certain
Persons in the Mergers -- Options held by Directors and Officers of PacifiCare."
VOTING AND NON-DISPOSITION AGREEMENTS
Pursuant to the UniHealth Voting Agreement, UniHealth, which holds, as of
the PacifiCare Record Date, in the aggregate approximately 47.7% of the
outstanding PacifiCare Class A Common Stock, has agreed to vote such shares in
favor of the adoption and approval of the Reorganization Agreement and has
delivered to FHP an irrevocable proxy with respect to the same. In addition,
UniHealth has agreed not to sell, transfer or otherwise dispose of shares of
PacifiCare Class A Common Stock beneficially owned or subsequently acquired by
it until the earliest of (i) the consummation of the Mergers, (ii) the
termination of the Reorganization Agreement, or (iii) April 30, 1997.
Jack R. Anderson, Richard M. Burdge, Sr. and Westcott W. Price III have
entered into the FHP Stockholder Voting Agreements with respect to shares
beneficially owned by them and certain shares beneficially owned by Other
Persons. As of the FHP Record Date, Messrs. Anderson, Burdge and Price
beneficially owned and were entitled to vote approximately 2.4% of the
outstanding FHP Common Stock and approximately 9.8% of the outstanding FHP
Preferred Stock, and the Other Persons beneficially collectively owned and were
entitled to vote approximately 1.2% of the outstanding FHP Common Stock and
approximately 6.9% of the outstanding FHP Preferred Stock. Pursuant to such
agreements, Messrs. Anderson, Burdge and Price have: (i) agreed to vote the
shares beneficially owned by them in favor of the Reorganization Agreement and
the Series A Amendment; (ii) agreed to use their best efforts to cause the Other
Persons to vote in favor of the Reorganization Agreement and the Series A
Amendment; (iii) granted proxies to officers of PacifiCare to vote shares
beneficially owned by them in favor of the Reorganization Agreement and the
Series A Amendment; and (iv) agreed to use their best efforts to cause the Other
Persons to deliver proxies to PacifiCare to vote shares beneficially owned by
such Other Persons in favor of the Reorganization Agreement and the Series A
Amendment. As of the FHP Record Date, proxies with respect to approximately 1.2%
of the outstanding FHP Common Stock and approximately 6.9% of the outstanding
FHP Preferred Stock had been received by PacifiCare from the Other Persons.
64
<PAGE>
AFFILIATE AGREEMENTS
It is a condition to consummation of the Mergers that each stockholder who
may be deemed to be an "affiliate," as such term is defined in Rule 145 of the
Act, of PacifiCare or FHP will execute an agreement that prohibits the sale,
pledge, transfer or other disposition of PacifiCare Holding Class A Common,
PacifiCare Holding Class B Common or PacifiCare Holding Preferred unless at such
time either: (i) such transfer shall be in conformity with the provisions of
Rule 145 under the Act; (ii) the stockholder shall have furnished to PacifiCare
Holding an opinion of counsel reasonably satisfactory to PacifiCare Holding, to
the effect that no registration under the Act would be required in connection
with the proposed offer, sale, pledge, transfer or other disposition; (iii) a
registration statement under the Act covering the proposed offer, sale, pledge,
or other disposition shall be effective under the Act; or (iv) if the
stockholder is a partnership, such transfer shall be a pro rata distribution
from the stockholder to its partners without receipt of consideration, in which
case each distributee shall receive stock certificates bearing appropriate
legends.
INTERESTS OF CERTAIN PERSONS IN THE MERGERS
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS OF PACIFICARE HOLDING
GENERALLY. From and after the Effective Time, until successors are duly elected
or appointed and qualified in accordance with applicable law, the Board of
Directors of PacifiCare Holding will consist of 12 directors, including the
current directors of PacifiCare immediately prior to the Effective Time, Jack R.
Anderson and Joseph F. Prevratil, current directors of FHP designated by the
Board of Directors of FHP, and Craig T. Beam and Bradley C. Call, designated by
the PacifiCare Board of Directors. The new directors designated by the FHP Board
of Directors shall: (i) be appointed to different classes; (ii) commence to
serve within 60 days of the Effective Time; and (iii) remain as directors until
their successors have been duly elected or until their earlier death, removal or
resignation, provided that they shall be renominated as required to be able to
serve a minimum of three years. If, prior to the end of such period, either of
the directors designated by the FHP Board of Directors becomes unable to serve
as a director, or is no longer qualified to serve as a director, the remaining
director (or his successor) shall select a replacement nominee (which nominee
shall be satisfactory to the PacifiCare Holding Board of Directors) to be
appointed to serve the remaining term.
It is expected that Terry O. Hartshorn will serve as Chairman of the
PacifiCare Holding Board of Directors, that Alan R. Hoops will serve as
PacifiCare Holding's President and Chief Executive Officer and that the other
individuals referred to in "Management of PacifiCare Holding -- Executive
Officers" will be executive officers of PacifiCare Holding.
OPTIONS HELD BY DIRECTORS AND OFFICERS OF PACIFICARE. Pursuant to the
provisions of PacifiCare's stock option plans, upon the consummation of the
Mergers, all unvested options held for at least six months by non-employee
directors and granted under the PacifiCare Directors Stock Option Plan will vest
in full and all other options held for at least six months by directors,
officers and employees of PacifiCare will be eligible to vest in full; however,
PacifiCare is requesting that certain of its executive officers waive this
acceleration provision. In exchange for this waiver, PacifiCare will grant each
of these executive officers additional options to purchase shares of PacifiCare
Class B Common Stock equal to approximately the number of options for which a
waiver is obtained. The grant of these additional options is contingent upon
receipt of the waiver and the closing of the Mergers. The additional options
will have terms consistent with existing options, except that vesting of the
options may be based, in part, upon the future performance of PacifiCare Holding
and the exercise price of such options will be the fair market value of the
PacifiCare Class B Common Stock at the time of grant.
OFFICERS AND DIRECTORS OF FHP. Certain members of FHP's management and
Board of Directors may be deemed to have certain interests in the Mergers that
are in addition to their interests as stockholders of FHP generally. The FHP
Board of Directors was aware of these interests and considered them, among other
matters, in approving the Reorganization Agreement and the transactions
contemplated thereby.
65
<PAGE>
FHP has entered into employment agreements dated various dates (each, an
"Employment Agreement" and collectively, "Employment Agreements") with each of
the following executives (each, an "Executive"): Gloria L. Austin, Senior Vice
President, Talbert, California Division; Robert N. Franklin, Senior Vice
President, Public Affairs; Larry D. Gray, President, FHP, Inc. (California
Region); Burke F. Gumbiner, Director, Senior Vice President and President,
Insurance Division; Jeffrey H. Margolis, Senior Vice President and Chief
Information Officer; Jack D. Massimino, President and CEO, Talbert; Roger
Moseley, President, Great States Insurance Company; Kenneth S. Ord, Senior Vice
President and Chief Financial Officer; Westcott W. Price III, President, Chief
Executive Officer and Vice Chairman of the Board; Eric D. Sipf, Senior Vice
President; and Michael J. Weinstock, General Counsel, Secretary and Senior Vice
President. Pursuant to Section 4.20 of the Reorganization Agreement, upon
effectiveness of the Mergers, PacifiCare has agreed to perform each of the
Employment Agreements in the same manner and to the same extent that FHP would
be required to perform such agreements. The Employment Agreements with Jack D.
Massimino and Gloria L. Austin may be replaced with similar agreements between
such persons and Talbert.
Each Employment Agreement provides that upon the date (the "Effective Date")
upon which a "Change of Control" occurs (defined under the Employment Agreements
to include the Mergers), FHP will continue to employ the Executive for the
period commencing on the Effective Date and ending on the third anniversary of
the Effective Date (the "Employment Period"). During the Employment Period, the
Executive's position, authority, duties and responsibilities shall be at least
commensurate in all material respects with the most significant of those held,
exercised and assigned at any time during the 120-day period immediately
preceding the Effective Date. During the Employment Period, the Executive shall
receive an annual base salary ("Annual Base Salary"), subject to periodic
review, at least equal to twelve times the highest monthly base salary paid or
payable, including any base salary which has been earned but deferred, to the
Executive by FHP and its affiliated companies in respect of the twelve-month
period immediately preceding the month in which the Effective Date occurs. In
addition, the Executive shall be entitled to participate in all benefit programs
applicable to other peer executives of FHP and its affiliated companies.
Each Employment Agreement contains provisions for termination of the
Executive's employment under various circumstances including death, Disability,
Cause or Good Reason (each as defined in the Employment Agreement).
If, during the Employment Period, FHP shall terminate the Executive's
employment other than for Cause, death or Disability or the Executive shall
terminate employment for Good Reason, FHP shall be required to pay to the
Executive the following payments and benefits: (i) bi-weekly salary continuation
at the Executive's Annual Base Salary as if the Executive had remained employed
through the end of the Employment Period; (ii) medical and dental coverage
continuation through the end of the Employment Period at the Executive's benefit
level as the date of termination; (iii) life insurance coverage continuation
through the end of the Employment Period at the Executive's current benefit
level as of the date of termination; (iv) out-placement services; (v) a payment
and other benefits determined by reference to the Executive's participation in
the ESOP and the FHP Money Purchase Pension Plan and in the manner provided in
the Employment Agreement; (vi) payment of all accrued vacation, holiday and
personal leave days as of the date of termination; and (vii) payment of any
unpaid incentive compensation, all as determined in the manner set forth in the
Employment Agreement.
If the Executive's employment is terminated by reason of the Executive's
death during the Employment Period, the Employment Agreement shall terminate
without further obligations to the Executive's legal representatives, other than
for payment of certain benefits specified in the Employment Agreement ("Other
Benefits"). If the Executive's employment is terminated by reason of the
Executive's Disability during the Employment Period, the Employment Agreement
shall terminate without further obligations to the Executive, other than for
payment of accrued obligations and Other Benefits. If the Executive's employment
is terminated for Cause during the Employment Period, the Employment Agreement
shall terminate without further obligations to the Executive other than the
obligation to pay to the Executive: (i) his Annual Base Salary through the date
of termination; (ii) the
66
<PAGE>
amount of any compensation previously deferred by the Executive; and (iii) Other
Benefits, in each case to the extent theretofore unpaid. If the Executive
voluntarily terminates employment during the Employment Period, excluding
termination for Good Reason, the Employment Agreement shall terminate without
further obligations to the Executive, other than for accrued obligations and the
timely payment or provision of Other Benefits.
Each Employment Agreement also contains provisions with respect to the
acceleration of options. Upon a termination of employment other than voluntarily
or for Cause, death or Disability, after a Change of Control and prior to the
end of the Employment Period, all outstanding options held by the Executive
vest, except to the extent such vesting would result in an "excess parachute
payment" nondeductible by FHP or would prevent accounting for the Change of
Control as a "pooling-of-interests." Options that do not vest by reason of the
exception become exercisable in accordance with their original vesting schedule
and remain exercisable until 90 days thereafter (or, if earlier, until the
original expiration date), provided that in the case of certain of such
Employment Agreements the Executive satisfies all three of the following
requirements: (i) the Executive must execute and deliver to FHP a Settlement and
Release Agreement waiving all claims against FHP and its affiliates (other than
obligations under the Employment Agreement and vested employee benefits) within
30 days after the Executive's Date of Termination; (ii) at or before the
Effective Time, the Executive must have executed and delivered to FHP a Covenant
Not to Compete for the period through the end of the Employment Period, imposing
certain restrictions upon the Executive conducting the same business in the same
cities and counties as carried on by FHP in California at the Effective Time
(the nature of the restrictions varies depending on the position of the
Executive); and (iii) requiring the Executive to serve without compensation as a
director, after the Effective Time, of any corporation controlling, under common
control with or controlled by FHP, if requested to do so and for so long as such
corporation may require (but not beyond the end of the Employment Period).
The Board of Directors of Talbert has authorized the grant of options,
subject to approval by PacifiCare, to purchase Talbert common stock in the
aggregate amount of approximately 40,000 shares to certain officers and
employees of Talbert (including Mr. Massimino and Ms. Austin) who will forfeit
unvested options in FHP.
Messrs. Price, Ord and Weinstock, respectively, hold 20,250, 3,000 and 3,000
shares of TMMC, of which 15,187.5, 2,250 and 2,250 shares, respectively, are
subject to restrictions on vesting relating to achievement by Talbert of
performance goals and continued employment by FHP. If TMMHC acquires FHP's
interest in TMMC and THSC, such individuals will exchange their shares in TMMC
for an equal number of shares in TMMHC which will be subject to the restrictions
set forth above. In September 1996, the Board of Directors authorized the
removal of such restrictions as they related to continued employment by FHP in
the event of a termination without cause of such individuals following a Change
of Control of FHP.
DIVIDENDS
Pursuant to the Restated Certificate, PacifiCare Holding shall make dividend
payments at the rate of $1.00 per share per annum to the holders of the
PacifiCare Holding Preferred, if any; moreover, PacifiCare Holding shall, on the
first date after the Mergers that dividends are payable, make dividend payments
to reflect the dividend rate payable on the FHP Preferred Stock from the last
dividend payment date prior to the Effective Time for the FHP Preferred Stock to
the Effective Time and the dividend rate payable on the PacifiCare Holding
Preferred from the Effective Time to the first dividend payment after the
Mergers. PacifiCare Holding has no current intention to pay dividends to holders
of PacifiCare Holding Class A Common or PacifiCare Holding Class B Common.
NASDAQ NATIONAL MARKET
The PacifiCare Holding Class A Common, PacifiCare Holding Class B Common and
PacifiCare Holding Preferred have been approved for quotation on the Nasdaq
National Market. Prior to the Effective Time, there has been no public market
for PacifiCare Holding Class A Common, PacifiCare Holding Class B Common or
PacifiCare Holding Preferred.
67
<PAGE>
MERGER EXPENSES AND FEES AND OTHER COSTS
PacifiCare and FHP estimate that they will incur direct transaction costs of
approximately $105 million associated with the Mergers. These nonrecurring
transaction costs will be included as a cost of the Mergers and allocated to the
assets acquired and liabilities assumed. In addition, PacifiCare Holding
anticipates incurring additional costs and expenses relating to integrating
PacifiCare and FHP. These costs will be charged to operations as incurred and
cannot be reasonably determined at this time.
Whether or not the Mergers are consummated, except as set forth herein, each
party will bear its own costs and expenses in connection with the Mergers and
the transactions contemplated in the Reorganization Agreement. PacifiCare has
paid to Dillon Read for its services a fee of $1 million and has agreed to pay
Dillon Read an additional fee of approximately $7 million upon the closing of
the Mergers. PacifiCare has also agreed to reimburse Dillon Read for its
reasonable expenses and to indemnify Dillon Read against certain liabilities in
connection with its engagement.
FHP has paid to Merrill Lynch for its services a fee of $1 million and has
agreed to pay Merrill Lynch an additional fee of $6.5 million, payable upon the
closing of the Mergers (less any fees paid previously by FHP to Merrill Lynch
with respect to Talbert). FHP has also agreed to reimburse Merrill Lynch for
certain of its reasonable out-of-pocket expenses and to indemnify Merrill Lynch
against certain liabilities related to or arising out of its engagement.
ACCOUNTING TREATMENT
The FHP Merger will be accounted for by PacifiCare Holding under the
"purchase" method of accounting in accordance with generally accepted accounting
principles. Under the purchase method of accounting, the purchase price of the
FHP Capital Stock, including direct and incremental costs of the FHP Merger,
will be allocated to the assets acquired and liabilities assumed based upon
their estimated fair value, with the excess purchase consideration allocated to
goodwill. The conversion of PacifiCare Class A Common Stock and PacifiCare Class
B Common Stock will be treated as a reorganization with no change in the
recorded amount of PacifiCare's assets and liabilities.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material United States federal income tax
consequences of the Mergers to PacifiCare, FHP, the PacifiCare stockholders and
the FHP stockholders. The summary is based upon the Code, administrative
pronouncements, judicial decisions and Treasury regulations, subsequent changes
to any of which may affect the tax consequences described herein. The summary
does not purport to be a comprehensive description of all of the tax
consequences applicable to a particular taxpayer. In particular, the summary
does not address the tax treatment to holders subject to special tax rules, such
as banks, insurance companies, dealers in securities or stockholders who
acquired their stock pursuant to the exercise of employee stock options or
otherwise as compensation. In addition, the summary only applies to a holder who
is a United States citizen or resident, a United States corporation, partnership
or other entity created or organized under the laws of the United States, or an
estate or trust the income of which is subject to United States federal income
taxation regardless of its source and (i) who holds shares of PacifiCare Common
Stock as capital assets; or (ii) who holds shares of FHP Capital Stock (and
Talbert Rights and stock of Talbert obtainable upon exercise of Talbert Rights)
as capital assets. PacifiCare and FHP stockholders are urged to consult their
tax advisors as to the particular United States federal income tax consequences
to them of the Mergers and as to the foreign, state, local and other tax
consequences thereof.
Except with respect to the Cash Consideration and the fair market value of
the Talbert Rights received by the FHP stockholders pursuant to the FHP Merger,
the Mergers have been structured to qualify as tax-deferred transactions under
the Code. The obligations of PacifiCare and FHP to consummate the Mergers are
conditioned on receipt by PacifiCare of an opinion from Cooley Godward LLP,
counsel to PacifiCare, and by FHP of an opinion from Sheppard, Mullin, Richter &
Hampton LLP, counsel to FHP, that the Mergers so qualify. See "The
Reorganization Agreement -- Conditions to the Mergers." Such opinions shall be
based upon certain facts, assumptions and representations
68
<PAGE>
contained in certificates of officers of PacifiCare Holding, FHP and PacifiCare.
Opinions of counsel are not binding on the IRS or the courts, and the parties do
not intend to request a ruling from the IRS with respect to the Mergers.
Accordingly, there can be no assurance that the IRS will not challenge such
conclusion or that a court will not sustain such challenge.
Cooley Godward LLP has provided an opinion to PacifiCare to the effect that
neither PacifiCare nor any of its stockholders will recognize gain or loss for
United States federal income tax purposes as a result of the PacifiCare Merger,
and accordingly that the PacifiCare Merger will have the consequences set forth
below under "-- Tax Consequences of the PacifiCare Merger" to PacifiCare and its
stockholders. Sheppard, Mullin, Richter & Hampton LLP has provided an opinion to
FHP to the effect that, under current law, the FHP Merger will constitute a
contribution of FHP Capital Stock by the stockholders of FHP to PacifiCare
Holding pursuant to the FHP Merger in exchange for the PacifiCare Holding Common
and PacifiCare Holding Preferred (together with the Cash Consideration and the
Talbert Rights, collectively, the "FHP Merger Consideration"), will constitute
part of a transaction governed by Section 351, and accordingly that the FHP
Merger will have the tax consequences set forth below under "-- Tax Consequences
of the FHP Merger" to the FHP stockholders. Each of such opinions referred to
above is subject to the conditions, qualifications and assumptions set for
therein and has been filed as an exhibit to the Registration Statement.
TAX CONSEQUENCES OF THE PACIFICARE MERGER
TAX CONSEQUENCES TO PACIFICARE STOCKHOLDERS. PacifiCare stockholders will
not recognize income, gain or loss upon the receipt of shares of PacifiCare
Holding Common in exchange for their shares of PacifiCare Common Stock. The tax
basis of the shares of PacifiCare Holding Common received by PacifiCare
stockholders will be the same as the tax basis of the shares of PacifiCare
Common Stock exchanged therefor. The holding period of the shares of PacifiCare
Holding Common received by PacifiCare stockholders will include the holding
period of the shares of PacifiCare Common Stock surrendered therefor.
TAX CONSEQUENCES TO PACIFICARE AND PACIFICARE HOLDING. No income, gain or
loss will be recognized by PacifiCare or PacifiCare Holding pursuant to the
PacifiCare Merger.
TAX CONSEQUENCES OF THE FHP MERGER
TAX CONSEQUENCES TO FHP STOCKHOLDERS. Subject to the discussion below
concerning fractional shares, each FHP stockholder (other than a stockholder who
exercises and perfects appraisal rights and holders of FHP Preferred Stock who
receive all cash following exercise of Special Conversion Rights) will recognize
gain (but not loss) measured by the lesser of either: (i) the sum of the Cash
Consideration and the fair market value at the Effective Time of the Talbert
Rights received by such stockholder pursuant to the FHP Merger; or (ii) the
excess, if any, of (a) the sum of the Cash Consideration plus the fair market
value at the Effective Time of the Talbert Rights and either the PacifiCare
Holding Common or PacifiCare Holding Preferred received by such stockholder
pursuant to the FHP Merger, over (b) the tax basis of such stockholder's FHP
Capital Stock. Such gain, if any, should be treated as long-term capital gain if
such FHP Capital Stock was held as a capital asset for more than one year at the
time of the consummation of the FHP Merger. However, the IRS may contend that
the Talbert Rights Offering should be treated as a distribution in respect of
FHP Capital Stock, and, if such a contention were successful, the fair market
value of the Talbert Rights would be treated as ordinary dividend income to the
extent of FHP's current and accumulated earnings and profits as calculated for
federal income tax purposes. An FHP stockholder who holds more than one block of
FHP Capital Stock (i.e., shares acquired at different times or prices) will
determine the amount of gain recognized and loss not recognized pursuant to the
FHP Merger separately with respect to each such block of FHP Capital Stock. For
this purpose, all of the Cash Consideration, Talbert Rights and PacifiCare
Holding Common or PacifiCare Holding Preferred received by a holder of FHP
Capital Stock will be allocated among the blocks of FHP Common Stock or FHP
Preferred Stock surrendered by such holder in proportion to their relative fair
market values at the Effective Time.
69
<PAGE>
The aggregate tax basis of the shares of PacifiCare Holding Common and
PacifiCare Holding Preferred received by an FHP stockholder, including any
fractional shares deemed to be received, will be the same as the aggregate tax
basis of the shares of FHP Capital Stock exchanged therefor (i) increased by the
gain recognized (as calculated above) and (ii) decreased by the Cash
Consideration and the fair market value at the Effective Time of the Talbert
Rights received by such stockholder. The aggregate tax basis will be allocated
among the stockholder's PacifiCare Holding Class A Common, PacifiCare Holding
Class B Common and PacifiCare Holding Preferred received in the FHP Merger,
including fractional shares deemed to be received, in proportion to their
relative fair market values at the Effective Time. The holding period of the
shares of PacifiCare Holding Common and shares of PacifiCare Holding Preferred
received by FHP stockholders will include the holding periods of the shares of
FHP Capital Stock surrendered therefor.
FHP stockholders who receive cash with respect to fractional shares will be
treated as having received such fractional shares pursuant to the FHP Merger and
then as having sold those fractional shares in the market for cash. Such FHP
stockholders will recognize gain or loss with respect to such fractional shares
in an amount equal to the difference between the tax basis allocated to such
fractional shares (as calculated above), and the cash so treated as received in
respect thereof. Any such gain or loss will be capital gain or loss and will
constitute long-term capital gain or loss if the holding period of such
fractional shares (as determined above) exceeds one year.
EXERCISE, SALE OR LAPSE OF TALBERT RIGHTS. An FHP stockholder who exercises
Talbert Rights will not recognize gain or loss as a result of such exercise. The
basis of stock received upon such exercise will include both the exercise price
and the fair market value of such Talbert Rights at the Effective Time. The
holding period of the stock acquired will commence upon exercise. An FHP
stockholder who sells Talbert Rights will recognize short-term capital gain or
loss upon the sale. An FHP stockholder who allows a Talbert Right to lapse will
recognize a short-term capital loss when the Talbert Right expires without
having been exercised.
TAX CONSEQUENCES TO FHP. No income, gain or loss will be recognized by FHP
upon the FHP Merger, except that, in connection with the Talbert Rights
Offering, FHP will recognize gain in the amount by which the fair market value
of the Talbert Common Stock exceeds the basis of FHP in its shares of Talbert
Common Stock and will recognize any remaining income, gain or loss with respect
to deferred intercompany transactions between FHP and Talbert.
TAX CONSEQUENCES OF INVESTMENT IN PACIFICARE HOLDING PREFERRED
DIVIDENDS AND OTHER DISTRIBUTIONS. Distributions on PacifiCare Holding
Preferred will be taxable as ordinary dividend income to the extent of
PacifiCare Holding's current or accumulated earnings and profits, as determined
for federal income tax purposes. Any distribution in excess of current or
accumulated earnings and profits will be treated first as a nontaxable recovery
of the holder's tax basis in the PacifiCare Holding Preferred, and thereafter as
gain from the sale or exchange of the PacifiCare Holding Preferred.
Any portion of a distribution on PacifiCare Holding Preferred that is
treated as ordinary dividend income may be eligible for the 70% dividends
received deduction available to corporate holders under Section 243 of the Code
if the holding period and other requirements for such deduction are met, subject
to certain limitations set forth in Sections 246 and 246A of the Code. Section
246(c) of the Code requires that, in order to be eligible for the
dividends-received deduction, a corporate stockholder must generally hold shares
of preferred stock for a 46-day minimum holding period. A taxpayer's holding
period for these purposes is suspended during any period in which a holder has
certain options or contractual obligations with respect to substantially
identical stock or holds one or more other positions with respect to
substantially identical stock that diminishes the risk of loss from holding the
preferred stock. Section 246A of the Code reduces the dividends-received
deduction allowed to a corporate stockholder that has incurred indebtedness
"directly attributable" to its investment in portfolio stock.
70
<PAGE>
Section 1059 of the Code requires a corporate holder of stock to reduce (but
not below zero) its basis in the stock by the "nontaxed portion" of any
"extraordinary dividend" if the holder has not held the stock subject to a risk
of loss for more than two years before the date of the announcement, declaration
or agreement (whichever is earliest) with respect to the "extraordinary
dividend." In addition, upon disposition of such stock, a corporate holder will
recognize gain to the extent the "nontaxed portion" of any "extraordinary
dividend" exceeded the holder's adjusted tax basis for the stock. Generally, the
"nontaxed portion" of an extraordinary dividend is the amount excluded from
income under Section 243 of the Code (relating to the dividends-received
deduction). An "extraordinary dividend" on the PacifiCare Holding Preferred is a
dividend that (i) equals or exceed 5% of the holder's adjusted tax basis in the
PacifiCare Holding Preferred (reduced for this purpose by the "nontaxed portion"
of any prior "extraordinary dividend"), treating all dividends having
ex-dividend dates within an 85-day period as one dividend, or (ii) exceeds 20%
of the holder's adjusted tax basis in the PacifiCare Holding Preferred, treating
all dividends having ex-dividend dates within a 365-day period as one dividend.
In determining whether a dividend paid on preferred stock is an extraordinary
dividend, a corporate stockholder may elect to substitute the fair market value
of the stock for such holder's tax basis for purposes of applying these tests,
provided such fair market value is established to the satisfaction of the
Secretary of the Treasury as of the day before the ex-dividend date. An
"extraordinary dividend" would also include any amount treated as a dividend in
the case of a redemption that is either non-pro rata as to all holders of
PacifiCare Holding stock or in partial liquidation of PacifiCare Holding,
regardless of the relative size of the dividend and regardless of the corporate
holder's holding period of the PacifiCare Holding Preferred.
A corporate stockholder's liability for alternative minimum tax may be
affected by the portion of the dividends received which such corporate
stockholder deducts in computing taxable income. This results from the fact that
corporate stockholders are required to increase alternative minimum taxable
income by 75% of the excess of adjusted current earnings over alternative
minimum taxable income (determined without regard to this adjusted current
earnings adjustment or the alternative tax net operating loss deduction).
REDEMPTION. A redemption of shares of PacifiCare Holding Preferred will be
treated as a dividend to the extent of PacifiCare Holding's current or
accumulated earnings and profits, unless the redemption (i) is "substantially
disproportionate" with respect to the holder under Section 302(b)(2) of the
Code, (ii) results in a "complete termination" of the holder's stock interest in
PacifiCare Holding under Section 302(b)(3) of the Code, or (iii) is "not
essentially equivalent to a dividend" with respect to the holder under Section
302(b)(1) of the Code. In determining whether any of these tests have been met,
shares considered to be owned by the holder by reason of certain constructive
ownership rules set forth in the Code (E.G., shares owned by certain related
individuals and entities and shares that may be acquired upon exercise of an
option or upon conversion of the PacifiCare Holding Preferred), as well as
shares actually owned, must generally be taken into account. Because the
determination as to whether any of the alternative tests of Section 302(b) of
the Code will be satisfied with respect to any particular holder of PacifiCare
Holding Preferred depends on the facts and circumstances at the time that the
determination must be made, holders of PacifiCare Holding Preferred are urged to
consult their tax advisors to determine such tax treatment.
If a redemption of PacifiCare Holding Preferred is not treated as a dividend
to a particular holder, it will be treated, as to that holder, as a taxable
exchange under Section 302(a) of the Code, with the result that such holder will
recognize gain or loss for federal income tax purposes equal to the difference
between (i) the amount of cash and fair market value of any property received
(less any portion thereof attributable to accumulated and unpaid dividends) and
(ii) the holder's adjusted tax basis in the PacifiCare Holding Preferred so
redeemed. Any such gain or loss will be capital gain or loss if the PacifiCare
Holding Preferred is held as a capital asset, and will be long-term capital gain
or loss if such PacifiCare Holding Preferred has been held for more than one
year. Any such portion attributable to accumulated and unpaid dividends will be
treated as ordinary income.
71
<PAGE>
If a redemption of PacifiCare Holding Preferred is treated as a dividend,
the amount of the distribution will be measured by the amount of cash and the
fair market value of any property received by the holder. The holder's adjusted
tax basis in the redeemed PacifiCare Holding Preferred will be transferred to
any of the holder's remaining stock in PacifiCare Holding. If, however, the
holder has no remaining stock in PacifiCare Holding, such basis could be
transferred to a related person or it may be lost.
REDEMPTION PREMIUM. Under Section 305(c) of the Code, if the redemption
price of PacifiCare Holding Preferred exceeds its issue price, the difference
("redemption premium") may be taxable as a constructive distribution of
additional PacifiCare Holding Preferred to the holder (treated as a dividend to
the extent of PacifiCare Holding's current and accumulated earnings and profits
and otherwise subject to the treatment described above for distributions) over a
certain period. Because the PacifiCare Holding Preferred provides for an
optional right of redemption by the Company at a price in excess of the issue
price, stockholders could be required to recognize such redemption premium under
a constant interest rate method similar to that provided by the Code for
accruing original issue discount on debt instruments, if, based on all of the
facts and circumstances, the optional redemption is more likely than not to
occur. If stock may be redeemed at more than one time, the time and price at
which such redemption is most likely to occur must be determined based on all of
the facts and circumstances. Applicable regulations promulgated under Section
305(c) of the Code provide a "safe harbor" under which a right to redeem will
not be treated as more likely than not to occur if (i) the issuer and the holder
are not related within the meaning of such regulations; (ii) there are no plans,
arrangements or agreements that effectively require or are intended to compel
the issuer to redeem the stock (disregarding, for this purpose, a separate
mandatory redemption); and (iii) exercise of the right to redeem would not
reduce the yield of the stock, as determined under such regulations. Regardless
of whether the optional redemption is more likely than not to occur,
constructive dividend treatment will not result if the redemption premium does
not exceed a DE MINIMIS amount. PacifiCare Holding intends to take the position
that the existence of PacifiCare Holding's optional redemption right does not
result in a constructive distribution to the holders of PacifiCare Holding
Preferred.
CONVERSION OF PACIFICARE HOLDING PREFERRED. In general, no gain or loss
will be recognized for federal income tax purposes upon the conversion of
PacifiCare Holding Preferred into shares of PacifiCare Holding Common, except
with respect to: (i) cash, if any, received in lieu of fractional shares of
PacifiCare Holding Common; and (ii) shares of PacifiCare Holding Common received
in respect of accrued and unpaid dividends. A holder will recognize taxable gain
or loss on cash received in lieu of fractional shares of PacifiCare Holding
Common in an amount equal to the difference between the amount of cash received
and the portion of the holder's tax basis in the PacifiCare Holding Preferred
attributable to those fractional shares. Shares of PacifiCare Holding Common
received in respect of accrued and unpaid dividends will be treated as a
dividend or other distribution in accordance with the rules described above, in
the amount of the fair market value of such shares. A holder's tax basis for
shares of PacifiCare Holding Common received upon conversion of PacifiCare
Holding Preferred will be equal to such holder's adjusted tax basis in the
PacifiCare Holding Preferred so converted (less the portion of such tax basis
allocable to fractional shares of PacifiCare Holding Common); provided that the
PacifiCare Holding Preferred was held as a capital asset, the holding period of
the PacifiCare Holding Common will include the holding period of the PacifiCare
Holding Preferred so converted, except that the holding period of shares
received in respect of accrued and unpaid dividends will begin upon conversion.
Adjustments in the conversion price of the PacifiCare Holding Preferred (or
the failure to make such adjustments) pursuant to the anti-dilution provisions
thereof to reflect distributions of cash or property to holders of PacifiCare
Holding Common may result in constructive distributions to holders of PacifiCare
Holding Preferred that could be taxable to them as dividends pursuant to Section
305(c) of the Code. If such a constructive distribution were to occur, a holder
of PacifiCare Holding Preferred could be required to recognize ordinary income
for federal income tax purposes without receiving a corresponding distribution
of cash.
72
<PAGE>
SALE OR EXCHANGE OF PACIFICARE HOLDING PREFERRED. If the PacifiCare Holding
Preferred is held as a capital asset, a holder generally will recognize capital
gain or loss for federal income tax purposes upon a sale or exchange of
PacifiCare Holding Preferred in an amount equal to the difference between such
holder's adjusted tax basis in the PacifiCare Holding Preferred and the amount
realized from such disposition. Any such capital gain or loss will be long-term
capital gain or loss if at the time of the sale or exchange the holder held such
PacifiCare Holding Preferred for more than one year.
OTHER MATTERS
BACKUP WITHHOLDING. Certain noncorporate holders may be subject to backup
withholding at a rate of 31% on payments of Cash Consideration, the Talbert
Rights and cash with respect to fractional shares. Backup withholding will not
apply, however, to a stockholder who furnishes a correct taxpayer identification
number or certificate of foreign status and makes any other required
certification or who otherwise is exempt from backup withholding. Generally,
each FHP stockholder will provide such certification on Form W-9 (Request for
Taxpayer Identification Number and Certification) or on Form W-8 (Certificate of
Foreign Status).
REPORTING REQUIREMENTS. Each FHP stockholder and each PacifiCare
stockholder (other than stockholders who exercise and perfect appraisal rights)
will be required to retain records and file with such holder's United States
federal income tax return a statement setting forth certain facts relating to
the Mergers. It is also expected that such stockholders will be asked to
indicate their tax basis in the shares surrendered by them pursuant to the
Mergers in the letter of transmittal.
TAX CONSEQUENCES TO FHP STOCKHOLDERS UPON EXERCISE OF APPRAISAL RIGHTS OR
SPECIAL CONVERSION RIGHTS. A holder of FHP Capital Stock who exercises and
perfects appraisal rights with respect to all stock owned actually or
constructively, and a holder of FHP Preferred Stock who exercises Special
Conversion Rights and receives all cash in exchange for such holder's FHP
Preferred Stock, will generally recognize capital gain or loss equal to the
difference between the amount of cash received (other than in respect of any
interest awarded by a court to a dissenting shareholder) and such stockholder's
tax basis in his or her shares of stock. Such capital gain or loss will be
long-term capital gain or loss if such shares have a holding period exceeding
one year at the time of the Mergers. Interest, if any, awarded to a dissenting
stockholder will be includable in such stockholder's income as ordinary income
for United States federal income tax purposes.
APPRAISAL RIGHTS
Stockholders of FHP who do not vote in favor of the FHP Merger may, under
certain circumstances and by following the procedure prescribed by the DGCL,
exercise appraisal rights and receive cash for their shares of FHP Capital
Stock. Stockholders of PacifiCare will not have appraisal rights under the DGCL
in connection with the PacifiCare Merger.
If a holder of FHP Capital Stock exercises appraisal rights in connection
with the FHP Merger under Section 262 of the DGCL ("Section 262"), any shares of
FHP Capital Stock in respect of which such rights have been exercised and
perfected will not be converted into the applicable consideration as determined
by the Reorganization Agreement but instead will be converted into the right to
receive such consideration as may be determined by the Delaware Court of
Chancery (the "Court") to be due with respect to such shares pursuant to the
laws of the State of Delaware. This Joint Proxy Statement/ Prospectus is being
sent by personal delivery or by mail to all holders of record of shares of FHP
Capital Stock on the FHP Record Date and constitutes notice of the appraisal
rights available to such holders under Section 262.
The following summary of the provisions of Section 262 is not intended to be
a complete statement of such provisions and is qualified in its entirety by
reference to the full text of Section 262, a copy of which is attached to this
Joint Proxy Statement/Prospectus as Appendix D and incorporated herein by
reference.
73
<PAGE>
Holders of shares of FHP Capital Stock who object to the FHP Merger and who
follow the procedures in Section 262 will be entitled to have their shares of
FHP Capital Stock appraised by the Court and to receive payment of the "fair
value" (determined as set forth below) of such shares as of the Effective Time.
A stockholder of FHP electing to exercise appraisal rights must, prior to
the vote concerning the FHP Merger at the FHP Meeting, perfect his, her or its
appraisal rights by demanding in writing from FHP the appraisal of his, her or
its shares of FHP Capital Stock. A vote against the FHP Merger will not
constitute a demand for appraisal. A stockholder electing to take such action
must do so by a separate written demand as provided in Section 262. A holder of
FHP Capital Stock who elects to exercise appraisal rights should mail his, her
or its written demand to FHP at P.O. Box 25186, Santa Ana, California
92799-5186, or deliver such written demand to FHP at 3120 Lake Center Drive,
Santa Ana, California 92704, in each case addressed to the Corporate Secretary.
The demand should specify the holder's name and mailing address, the number of
shares of FHP Capital Stock owned and that such holder is demanding appraisal of
his, her or its shares. Within ten days after the Effective Time, FHP must
provide notice of the Effective Time to all stockholders who have complied with
Section 262 and have not voted in favor of the FHP Merger. Only a holder of
record of shares of FHP Capital Stock (or his, her or its duly appointed
representative) is entitled to assert appraisal rights for the shares registered
in that holder's name.
Within 120 days after the Effective Time, any stockholder who has made a
valid written demand and who has not voted in favor of the FHP Merger may: (i)
file a petition in the Court demanding a determination of the value of shares of
FHP Capital Stock; and (ii) upon written request, receive from FHP a statement
setting forth the aggregate number of shares of FHP Capital Stock not voted in
favor of the FHP Merger and with respect to which demands for appraisal have
been received and the aggregate number of holders of such shares. Such statement
must be mailed within ten days after the written request therefor has been
received by FHP.
If a petition for an appraisal is timely filed, at a hearing on such
petition, the Court is required to determine the holders of dissenting shares
entitled to appraisal rights ("Dissenting Shares") and to determine the "fair
value" of the Dissenting Shares exclusive of any element of value arising from
the accomplishment or expectation of the FHP Merger, together with a fair rate
of interest, if any, to be paid upon the value of the Dissenting Shares. In
determining such "fair value", the Court is required to take into account all
relevant factors, including the market value of FHP Capital Stock and the net
asset and earnings value of FHP, and in determining the fair rate of interest,
the Court may consider the rate of interest which FHP would have had to pay to
borrow money during the pendency of the proceeding. Upon application by a
stockholder, the Court may also order that all or a portion of the expenses
incurred by any stockholder in connection with the appraisal proceeding,
including, without limitation, reasonable attorneys fees and the fees and
expenses of experts utilized in the appraisal proceeding, be charged pro rata
against the value of all the shares of FHP Capital Stock entitled to appraisal.
Any holder of Dissenting Shares who has duly demanded an appraisal under
Section 262 will not, after the Effective Time, be entitled to vote the shares
subject to such demand for any purpose or be entitled to the payment of
dividends or other distributions (including the Talbert Rights) on such
Dissenting Shares (except dividends or other distributions payable to
stockholders of record as of a date prior to the Effective Time).
If any holder of shares of FHP Capital Stock who demands appraisal under
Section 262 effectively withdraws or loses his, her or its right to appraisal,
the shares of such holder will be converted into a right to receive the FHP
Merger consideration for such holder's shares of FHP Capital Stock as is
determined in accordance with the Reorganization Agreement; provided, however,
that if such withdrawal or loss of appraisal rights takes place after the
Effective Time, in lieu of Talbert Rights, such holder will receive cash in an
amount equal to the average closing price of the Talbert Rights on their first
five days of trading. A holder will effectively lose his right to appraisal if
such holder votes in favor
74
<PAGE>
of the FHP Merger or if no petition for appraisal is filed within 120 days after
the Effective Time, or if the holder delivers to FHP a written withdrawal of
such holder's demand for an appraisal and an acceptance of the terms of the FHP
Merger, except that any such attempt to withdraw made more than 60 days after
the Effective Time requires the written approval of FHP. A holder of stock
represented by certificates may also lose his, her or its right to appraisal if
he, she or it fails to comply with the Court's direction to submit such
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings.
IN VIEW OF THE COMPLEXITIES OF THE FOREGOING PROVISIONS OF THE DELAWARE LAW,
FHP STOCKHOLDERS WHO ARE CONSIDERING PURSUING APPRAISAL RIGHTS MAY WISH TO
CONSULT LEGAL COUNSEL.
75
<PAGE>
THE REORGANIZATION AGREEMENT
GENERAL
THE FOLLOWING DESCRIPTION OF THE REORGANIZATION AGREEMENT IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE COMPLETE TEXT OF THE REORGANIZATION AGREEMENT,
WHICH IS INCORPORATED BY REFERENCE HEREIN AND A COPY OF WHICH IS ANNEXED TO THIS
JOINT PROXY STATEMENT/PROSPECTUS AS APPENDIX A.
The Reorganization Agreement provides for the merger of FHP Merger Sub with
and into FHP and the merger of PacifiCare Merger Sub with and into PacifiCare.
As a result, the separate existence of FHP Merger Sub and PacifiCare Merger Sub
shall cease. FHP will be the surviving corporation of the FHP Merger and its
separate corporate existence, with all its purposes, objects, rights,
privileges, powers and franchises, shall continue unaffected by such merger and
PacifiCare will be the surviving corporation of the PacifiCare Merger and its
separate corporate existence, with all its purposes, objects, rights,
privileges, powers and franchises, shall continue unaffected by such merger.
Upon completion of the Mergers, PacifiCare and FHP will be wholly owned
subsidiaries of PacifiCare Holding and the former stockholders of FHP and
PacifiCare will become stockholders of PacifiCare Holding. FHP Merger Sub and
PacifiCare Merger Sub have been formed solely for the purpose of effecting the
FHP Merger and the PacifiCare Merger, respectively, and there will be no other
activity in FHP Merger Sub and PacifiCare Merger Sub after the Effective Time.
The Mergers will become effective upon the filing of Certificates of Merger with
the Delaware Secretary of State. Such filings are anticipated to take place as
soon as practicable after the receipt of all required regulatory approvals and
the satisfaction or waiver of the other conditions to the Mergers. It is
currently anticipated that the Effective Time will occur in early January 1997.
There can be no assurance, however, that the required regulatory approvals will
be obtained, or that the other conditions to the Mergers will be satisfied by
such date, or at all. See "-- Conditions to the Mergers" and "The Merger and
Related Transactions -- Regulatory Matters."
MERGER CONSIDERATION
CONSIDERATION FOR CAPITAL STOCK. For a description of the consideration to
be received in the Mergers by the holders of FHP Capital Stock and PacifiCare
Common Stock, see "The Mergers and Related Transactions -- Merger
Consideration."
STOCK OPTIONS AND BENEFIT PLANS. For a description of the treatment of the
FHP and PacifiCare stock options and employee benefit plans, see "The Mergers
and Related Transactions -- Stock Options; Benefit Plans."
APPRAISAL RIGHTS. Holders of the FHP Capital Stock are entitled to exercise
appraisal rights in connection with the FHP Merger. Holders of PacifiCare Common
Stock are not entitled to exercise appraisal rights in connection with the
PacifiCare Merger. See "The Mergers and Related Transactions -- Appraisal
Rights."
EXCHANGE OF SHARES. For a description of exchange procedures, see "The
Mergers and Related Transactions -- Conversion of Shares; Procedures for
Exchange of Certificates; No Fractional Shares."
IRREVOCABLE ELECTION. For a discussion of the Irrevocable Election, see
"The Mergers and Related Transactions--Merger Consideration--FHP--Irrevocable
Election by FHP Preferred Stockholders."
CORPORATE MATTERS
As of the Effective Time, the Certificates of Incorporation and Bylaws of
PacifiCare and FHP will be the Certificates of Incorporation and Bylaws of
PacifiCare Surviving Corporation and FHP Surviving Corporation, respectively.
PacifiCare and FHP have agreed to cause PacifiCare Holding to take all
necessary corporate action to cause the PacifiCare Holding Certificate of
Incorporation prior to the Effective Time to be in substantially the form of the
Restated Certificate (and to file a Certificate of Designation creating a
76
<PAGE>
Series A-1 Preferred Stock with rights, preferences, privileges and restrictions
identical in all substantial respects to those of the FHP Preferred Stock if the
Series A Required Vote is not obtained), and to cause the Bylaws of PacifiCare
Holding prior to the Effective Time to be substantially in the form of the
Bylaws of PacifiCare in effect on the date of execution of the Reorganization
Agreement, subject to certain permitted changes.
Immediately after the Effective Time, the PacifiCare Holding Board of
Directors will consist of 12 persons. For a discussion of the composition of the
PacifiCare Holding Board of Directors, see "The Mergers and Related Transactions
- -- Interests of Certain Persons in the Mergers."
CONDITIONS TO THE MERGERS
The obligations of PacifiCare and PacifiCare Holding to effect the Mergers
and otherwise consummate the transactions contemplated by the Reorganization
Agreement are subject to fulfillment, at or prior to the Closing, of conditions,
among others, to the following general effect:
(i) the representations and warranties of FHP contained in the
Reorganization Agreement shall have been accurate in all material respects
as of the date of execution of the Original Reorganization Agreement and
shall be accurate in all respects as of the date of the Closing as if made
on the date of the Closing, except that any inaccuracies will be disregarded
if the circumstances giving rise to such inaccuracies do not constitute, and
would not reasonably be expected to result in, a material adverse effect on
FHP;
(ii) FHP shall have complied with and performed in all material respects
each covenant contained in the Reorganization Agreement that is required to
be performed by FHP on or prior to the date of the Closing;
(iii) since the date of the Original Reorganization Agreement, there
shall not have been any material adverse effect on FHP and there shall not
have occurred any change or development, or any combination of changes or
developments, that would reasonably be expected to have a material adverse
effect on FHP;
(iv) the Reorganization Agreement, the Mergers and the PacifiCare
Amendment shall have been adopted and approved by the FHP Required Vote and
the PacifiCare Required Vote, as applicable;
(v) no order to restrain, enjoin or otherwise prevent the consummation
of either of the Mergers shall have been entered by any court or
governmental authority;
(vi) there shall not be pending or threatened any proceeding in which a
governmental authority is or is threatened to become a party or in which
there is a reasonable possibility of an outcome that would have a material
adverse effect on PacifiCare Holding, PacifiCare or FHP: (a) challenging or
seeking to restrain or prohibit the consummation of either of the Mergers;
(b) relating to either of the Mergers and seeking to obtain any damages
material to PacifiCare Holding or PacifiCare; (c) seeking to prohibit or
limit in any material respect PacifiCare Holding's ability to exercise
ownership rights with respect to the stock of the Surviving Corporations; or
(d) which would materially and adversely affect the right of PacifiCare
Holding, the Surviving Corporations or any subsidiary thereof to own the
assets or operate the business of PacifiCare, FHP or any of their
subsidiaries; and
(vii) PacifiCare Holding, PacifiCare and FHP shall have received (a) all
material approvals, licenses, consents, assignments and authorizations of
governmental authorities and other persons as may be required (1) to permit
the performance by PacifiCare Holding, PacifiCare and FHP of their
respective obligations under the Reorganization Agreement and the
consummation of the Mergers and (2) to permit PacifiCare Holding and the
Surviving Corporations and their respective subsidiaries to conduct their
business and operations in the manner currently conducted, and (b) certain
certifications, legal opinions, approvals and assurances as set forth in the
Reorganization Agreement.
77
<PAGE>
The obligations of FHP to effect the Mergers and otherwise consummate the
transactions contemplated by the Reorganization Agreement are subject to the
fulfillment, at or prior to the Closing, of conditions, among others, to the
following general effect:
(i) the representations and warranties of PacifiCare contained in the
Reorganization Agreement shall have been accurate in all material respects
as of the date of the execution of the Original Reorganization Agreement and
shall be accurate in all respects as of the date of the Closing as if made
on and as of the date of the Closing, except that any inaccuracies will be
disregarded if the circumstances giving rise to such inaccuracies do not
constitute, and would not reasonably be expected to result in, a material
adverse effect on PacifiCare;
(ii) PacifiCare shall have complied with and performed in all material
respects each covenant contained in the Reorganization Agreement that is
required to be performed by PacifiCare on or prior to the date of the
Closing;
(iii) since the date of the Original Reorganization Agreement, there
shall not have been any material adverse effect on PacifiCare, and there
shall not have occurred any change or development, or any combination of
changes or developments, that would reasonably be expected to have a
material adverse effect on PacifiCare;
(iv) the Reorganization Agreement, the Mergers and the PacifiCare
Amendment shall have been adopted and approved by the FHP Required Vote and
the PacifiCare Required Vote, as applicable;
(v) no order to restrain, enjoin or otherwise prevent the consummation
of either of the Mergers shall have been entered by any court or
governmental authority;
(vi) there shall not be pending or threatened any proceeding in which a
governmental authority is or is threatened to become a party (a) challenging
or seeking to restrain or prohibit the consummation of either of the
Mergers; (b) relating to either of the Mergers and seeking to obtain any
damages material to FHP; (c) seeking to prohibit or limit in any material
respect PacifiCare Holding's ability to exercise ownership rights with
respect to the stock of the Surviving Corporations; or (d) which would
materially and adversely affect the right of PacifiCare Holding, the
Surviving Corporations or any subsidiary thereof to own the assets or
operate the business of PacifiCare or FHP or any of their subsidiaries; and
(vii) FHP shall have received certain certifications, legal opinions,
approvals and assurances as set forth in the Reorganization Agreement.
All the conditions to the Mergers must either be satisfied or waived prior
to the consummation of the Mergers.
REPRESENTATIONS AND WARRANTIES
The Reorganization Agreement contains certain representations and
warranties, including without limitation, representations and warranties by each
of PacifiCare, PacifiCare Holding and FHP as to: (i) organization, subsidiaries
and capitalization; (ii) financial statements and Commission filings; (iii)
absence of certain changes or events; (iv) tax matters; (v) contracts; (vi)
employees; (vii) litigation and claims; (viii) compliance with laws; (ix)
properties; (x) adequacy of disclosure; (xi) transactions with affiliates; (xii)
vote required; (xiii) application of takeover provisions; (xiv) authorization;
(xv) fairness opinions; (xvi) financial advisors; (xvii) enforceability; (xviii)
governmental consents required; (xix) absence of conflicts; (xx) reserves; (xxi)
audits or investigations by governmental entities; (xxii) environmental
provisions; and (xxiii) intellectual property.
The Reorganization Agreement contains further representations and warranties
by PacifiCare and PacifiCare Holding as to: (i) the authorization of PacifiCare
Merger Sub and FHP Merger Sub; (ii) the issuance of PacifiCare Holding Common
and Preferred; and (iii) the formation of PacifiCare Holding.
78
<PAGE>
CERTAIN COVENANTS
The Reorganization Agreement requires that until the Effective Time FHP
shall conduct its business in the ordinary and usual course consistent with past
practice and use all commercially reasonable efforts to maintain its business
organization and satisfactory relations with persons having business
relationships with FHP. Except as expressly contemplated by the Reorganization
Agreement, FHP shall not:
(i) declare, set aside or pay any dividend or make any other
distribution in respect of any capital stock, with certain exceptions;
(ii) split, combine or reclassify any capital stock of FHP or acquire
any capital stock of FHP;
(iii) with certain exceptions, issue, encumber, or transfer, or authorize
or propose the issuance, encumbrance, or transfer of, any shares of FHP
Capital Stock or any securities convertible into, or rights to acquire, any
such securities (except that FHP may issue FHP Common Stock upon the
exercise of outstanding stock options or upon the conversion of outstanding
FHP Preferred Stock);
(iv) amend the Certificate of Incorporation, Bylaws or other
organizational or charter documents of FHP or amend its Amended and Restated
Rights Agreement (the "Restated Rights Plan");
(v) acquire any business or entity;
(vi) dispose of or encumber any of its material assets, except in the
ordinary course of business consistent with past practice;
(vii) except pursuant to existing lines of credit, incur any indebtedness
for borrowed money or guarantee any obligation of any other person,
excluding indebtedness for borrowed money or guaranties that aggregate up to
$20 million or the proceeds of which are used to capitalize Talbert;
(viii) adopt or amend in any material respect any collective bargaining
agreement or FHP employee benefit plan, or enter into or amend any
employment agreement or severance agreement with any director or officer;
(ix) except in the ordinary course of business consistent with past
practice, enter into any material contract or agreement involving payments
in excess of market rates;
(x) change any compensation payable or to become payable to any of its
officers or employees (other than in the ordinary course of business
consistent with past practice, but subject to certain limitations);
(xi) make any capital expenditures in excess of $2.5 million in the
aggregate, except those set forth in a budget reviewed and approved by
PacifiCare and FHP;
(xii) make any loan to or engage in any transaction with any director or
officer;
(xiii) settle or compromise any lawsuit or other proceeding against FHP or
any of its subsidiaries for an amount in excess of $5 million;
(xiv) cause or permit any material amendment, modification or premature
termination to any material contract of FHP;
(xv) cause or agree to the termination or material modification of any
material licensure, qualification or authorization of FHP or any material
subsidiary; or
(xvi) enter into any new contract or amend or modify any existing contract
between FHP and Talbert or to cause any capital transfer between FHP and
Talbert, except as contemplated by the Reorganization Agreement.
79
<PAGE>
The Reorganization Agreement further provides that prior to the Effective
Time, except as contemplated by the Reorganization Agreement, PacifiCare shall
not:
(i) declare, set aside or pay any dividend or make any other
distribution in respect of any capital stock;
(ii) split, combine or reclassify any capital stock of PacifiCare or
acquire any capital stock of PacifiCare;
(iii) issue, encumber or transfer, or authorize or propose the issuance,
encumbrance or transfer of, any shares of capital stock of PacifiCare or any
securities convertible into, or rights to acquire, any such securities
(except that PacifiCare may issue PacifiCare Common Stock upon the exercise
of outstanding stock options);
(iv) amend the Certificate of Incorporation, Bylaws or other
organizational or charter documents of PacifiCare;
(v) acquire any business or entity;
(vi) dispose of or encumber any of its material assets, except in the
ordinary course of business consistent with past practice; or
(vii) except pursuant to existing lines of credit, incur any indebtedness
for borrowed money or guarantee any obligation of any other person,
excluding indebtedness for borrowed money or guaranties that aggregate up to
$20 million and financing the purpose of which is to consummate the Mergers.
The Reorganization Agreement contains certain other covenants including
covenants relating to: (i) information and access; (ii) preparation and filing
of the Registration Statement; (iii) preparation and filing of disclosure
documents, actions and filings with governmental bodies, agencies, officials or
authorities and other third parties; (iv) public announcements; (v) affiliate
agreements; (vi) tax qualification and opinion back-up certificates; (vii)
notices of certain events; (viii) compliance with regulations; (ix) assumption
of certain FHP employment agreements; and (x) absence of activity by PacifiCare
Holding unrelated to the Mergers.
Pursuant to the Reorganization Agreement, FHP will take all action necessary
in accordance with applicable law to convene the FHP Meeting to vote upon the
adoption and approval of the Reorganization Agreement and the Series A
Amendment, and the recommendation of the FHP Board of Directors that the holders
of FHP Capital Stock adopt and approve the Reorganization Agreement and the FHP
Amendment at the FHP Meeting shall not be withdrawn, amended or modified in a
manner adverse to PacifiCare. Under the Reorganization Agreement, PacifiCare
will take all action necessary in accordance with applicable law to call or
convene the PacifiCare Meeting to vote upon the adoption and approval of the
Reorganization Agreement and the PacifiCare Amendment.
Nothing in the Reorganization Agreement shall prevent the Board of Directors
of FHP or PacifiCare from withdrawing, amending or modifying its recommendation
in favor of the respective Merger and approval and adoption of the
Reorganization Agreement and related matters to the extent that such Board of
Directors shall conclude in good faith, based upon the advice of its outside
counsel, that such withdrawal, amendment or modification is required in order
for such Board of Directors to act in a manner that is consistent with its
fiduciary obligations under applicable law.
Under the Reorganization Agreement, PacifiCare Holding, PacifiCare and FHP
have agreed to use all commercially reasonable efforts to take, or cause to be
taken, all actions necessary to consummate the Mergers and the other
transactions contemplated by the Reorganization Agreement, subject to certain
exceptions for the benefit of PacifiCare Holding.
PacifiCare, PacifiCare Holding and FHP have reached certain agreements
concerning Talbert. See "The Mergers and Related Transactions -- Talbert Rights
Offering."
80
<PAGE>
PacifiCare Holding has agreed to assume FHP's 7% Senior Notes Due 2003 in
accordance with the terms thereof if required by applicable law or the terms of
such notes.
NON-SOLICITATION
Pursuant to the Reorganization Agreement, FHP will not, and it will not
authorize or permit any of its subsidiaries, officers, directors or employees or
any of its or its subsidiaries' representatives, directly or indirectly, to: (i)
solicit, initiate or knowingly encourage or induce the making of any Acquisition
Proposal; (ii) furnish non-public information regarding FHP or any of its
subsidiaries in connection with an Acquisition Proposal or potential Acquisition
Proposal; (iii) negotiate or engage in discussions with any third party with
respect to any Acquisition Proposal; (iv) approve, endorse or recommend any
Acquisition Proposal; or (v) enter into any letter of intent, contract or other
instrument related directly or indirectly to any Acquisition Proposal (other
than a nondisclosure agreement entered into in accordance with the
Reorganization Agreement or contracts with advisors or consultants). The
foregoing shall not be construed to prohibit FHP or its Board of Directors from
taking any actions or permitting any actions described above (other than any
action described in clause (i) above) with respect to any Acquisition Proposal
to the extent that the FHP Board of Directors shall conclude in good faith,
based upon the advice of its outside counsel, that such action is required in
order for the FHP Board of Directors to act in a manner that is consistent with
its fiduciary obligations under applicable law (provided that, in the event any
letter of intent, contract or other instrument of the type described in clause
(v) of the preceding sentence is entered into, the consummation of any
transaction contemplated by the Acquisition Proposal to which such instrument
relates must be expressly conditioned upon the prior and valid termination of
the Reorganization Agreement and the payment of any fee due under the
termination provisions of the Reorganization Agreement). See "-- Termination"
and "-- Expenses and Termination Fees." An "Acquisition Proposal" shall mean any
proposal (other than any proposal by PacifiCare or PacifiCare Merger Sub or in
connection with the separation of Talbert) regarding: (i) any merger,
consolidation, share exchange, business combination or other similar transaction
or series of related transactions involving FHP; (ii) any sale, lease, exchange,
transfer or other disposition of the assets of FHP or any subsidiary of FHP
constituting more than 50% of the consolidated assets of FHP or accounting for
more than 50% of the consolidated revenues of FHP in any one transaction or in a
series of related transactions; or (iii) any offer to purchase, tender offer,
exchange offer or any similar transaction or series of related transactions made
by any person involving more than 50% of the outstanding shares of the capital
stock of FHP or the filing of any statement on Schedule 14D-1 with the
Commission in connection therewith. FHP will immediately advise PacifiCare
orally and in writing of the receipt of any Acquisition Proposal or any inquiry
relating to an Acquisition Proposal prior to the Effective Time, including a
full description of the terms of such Acquisition Proposal.
INDEMNIFICATION AND INSURANCE
Pursuant to the Reorganization Agreement, with respect to actions, omissions
and events occurring through the Effective Time, all rights to indemnification
existing in favor of the current directors and officers of FHP and PacifiCare as
provided in their respective Certificates of Incorporation and indemnification
agreements shall survive the Mergers and shall be observed by PacifiCare Holding
and the Surviving Corporations.
In addition, under the Reorganization Agreement, PacifiCare Holding will,
from and after the Closing, to the fullest extent permitted under applicable
laws, indemnify, defend and hold harmless the current officers and directors of
PacifiCare and FHP (collectively, the "Indemnified Parties") against all losses,
expenses, claims, damages, liabilities or amounts that are paid in settlement
of, or otherwise incurred in connection with, any claim, action, suit,
proceeding or investigation by reason of the fact that such Indemnified Party
was a director or officer of PacifiCare or FHP prior to the Effective Time and
arising out of actions, omissions and events occurring at or prior to the
Effective Time or in connection with the Mergers and the actions taken in
connection therewith (a "Claim") and shall pay expenses in advance of the final
disposition of any such Claim to each Indemnified Party.
81
<PAGE>
PacifiCare Holding will maintain in effect for a period of not less than
five years from the Effective Time the current policy of directors' and
officers' liability insurance maintained by PacifiCare and FHP with respect to
matters occurring prior to the Effective Time; however, (i) PacifiCare Holding
may substitute policies of comparable coverage, and (ii) PacifiCare Holding
shall not be required to pay an annual premium for such insurance in excess of
200% of the last annual premium paid by PacifiCare or FHP, as the case may be,
for such insurance prior to the date of execution of the Reorganization
Agreement (the "200% Amount"). In the event the annual premium for such
insurance exceeds the 200% Amount, PacifiCare Holding shall be entitled to
reduce the amount of coverage of such insurance to the amount of coverage that
can be obtained for a premium equal to the 200% Amount.
TERMINATION
Pursuant to the Reorganization Agreement, the Reorganization Agreement may
be terminated prior to the Effective Time, whether before or after approval of
the Mergers by the stockholders of FHP and PacifiCare:
(i) by mutual written consent of the respective Boards of Directors of
PacifiCare and FHP;
(ii) by either PacifiCare or FHP if either of the Mergers shall not have
been consummated by April 30, 1997 (unless the failure to consummate such
Merger is attributable to a failure on the part of the party seeking to
terminate the Reorganization Agreement to perform any material obligation
required to be performed by such party at or prior to the Effective Time);
(iii) by either PacifiCare or FHP if a court of competent jurisdiction or
governmental authority shall have issued a final and nonappealable order,
decree or ruling, or shall have taken any other action, having the effect of
permanently restraining, enjoining or otherwise prohibiting either of the
Mergers;
(iv) by either PacifiCare or FHP if the FHP Meeting shall have been held,
and the Reorganization Agreement and the FHP Merger shall not have been
adopted and approved at such meeting by the FHP Required Vote;
(v) by PacifiCare (at any time prior to the adoption and approval of
Reorganization Agreement and the FHP Merger by the stockholders of FHP by
the FHP Required Vote) if a Triggering Event (as defined below) shall have
occurred;
(vi) by either PacifiCare or FHP if the PacifiCare Meeting shall have
been held, and the Reorganization Agreement, the PacifiCare Merger and any
related matters shall not have been adopted and approved at such meeting by
the PacifiCare Required Vote;
(vii) by PacifiCare if any of FHP's representations and warranties
contained in the Reorganization Agreement shall be or shall have become
materially inaccurate as of the date of the Original Reorganization
Agreement, or if any of FHP's covenants contained in the Reorganization
Agreement shall have been breached in any material respect; provided,
however, that if an inaccuracy in FHP's representations and warranties or a
breach of a covenant by FHP is curable by FHP and FHP is continuing to
exercise all commercially reasonable efforts to cure such inaccuracy or
breach, then PacifiCare may not terminate the Reorganization Agreement under
such provision on account of such inaccuracy or breach; or
(viii) by FHP if any of PacifiCare's or PacifiCare Holding's
representations and warranties contained in the Reorganization Agreement
shall be or shall have become materially inaccurate as of the date of the
Original Reorganization Agreement, or if any of PacifiCare's or PacifiCare
Holding's covenants contained in the Reorganization Agreement shall have
been breached in any material respect; provided, however, that if an
inaccuracy in PacifiCare's or PacifiCare Holding's representations and
warranties or a breach of a covenant by PacifiCare or PacifiCare Holding is
curable by PacifiCare or PacifiCare Holding and PacifiCare or PacifiCare
Holding is continuing to
82
<PAGE>
exercise all commercially reasonable efforts to cure such inaccuracy or
breach, then FHP may not terminate the Reorganization Agreement under such
provision on account of such inaccuracy or breach.
A "Triggering Event" shall be deemed to have occurred if: (i) the FHP Board
of Directors shall have failed to recommend, shall for any reason have withdrawn
or shall have amended or modified in a manner adverse to PacifiCare its
unanimous recommendation in favor of the FHP Merger or approval or adoption of
the Reorganization Agreement, or FHP shall have failed to include in the Joint
Proxy Statement/Prospectus the unanimous recommendation of the FHP Board of
Directors in favor of the FHP Merger and approval and adoption of the
Reorganization Agreement and related matters; (ii) the FHP Board of Directors
shall have approved, endorsed or recommended any Acquisition Proposal; (iii) FHP
shall have entered into any letter of intent, contract or other instrument
related directly or indirectly to any Acquisition Proposal (other than certain
nondisclosure agreements or contracts with advisors or consultants); or (iv) FHP
shall have failed to hold the FHP Meeting as promptly as practicable and in any
event within 60 days after the Registration Statement is declared effective and
any Acquisition Proposal shall have been made during such 60-day period.
EXPENSES AND TERMINATION FEES
Pursuant to the Reorganization Agreement, all fees and expenses incurred in
connection with the Reorganization Agreement and the transactions contemplated
by the Reorganization Agreement shall be paid by the party incurring such
expenses, whether or not the Mergers are consummated.
If the Reorganization Agreement is terminated: (i) by either PacifiCare or
FHP after an FHP Meeting at which the Reorganization Agreement has not been
adopted and approved by the holders of FHP Common Stock and a Triggering Event
has occurred; or (ii) by PacifiCare at any time prior to the adoption and
approval of the Reorganization Agreement by the holders of FHP Common Stock and
after a Triggering Event, then FHP shall pay to PacifiCare a fee of $50 million.
If the Reorganization Agreement is terminated after an FHP Meeting at which the
Reorganization Agreement has not been adopted and approved and a Triggering
Event has not occurred and, within 12 months of the date of the FHP Meeting, FHP
enters into an agreement relating to an Acquisition Proposal, FHP shall pay to
PacifiCare a fee of $50 million.
If the Reorganization Agreement is terminated after a PacifiCare Meeting at
which the consummation of the PacifiCare Merger and any related matters are not
adopted and approved, then PacifiCare shall pay to FHP a fee of $50 million. If
the Mergers are not consummated solely by reason of a breach by PacifiCare
caused by its failure to enter into definitive agreements related to the
financing contemplated by the Commitment Letter, or the termination of such
agreements or the failure of PacifiCare to receive the funding contemplated by
the Commitment Letter, and after diligent efforts to find commercially
reasonable alternative financing, then PacifiCare shall pay to FHP a fee of $100
million.
NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES
None of the representations and warranties contained in the Reorganization
Agreement or in any instrument delivered pursuant to the Reorganization
Agreement shall survive the Mergers.
AMENDMENT; WAIVER
The Reorganization Agreement may be amended by an instrument in writing
signed on behalf of each of the parties and with the approval of the respective
Boards of Directors of PacifiCare Holding, FHP and PacifiCare at any time before
or after approval of the Reorganization Agreement by the stockholders of FHP and
the stockholders of PacifiCare; provided, however, that after any such
stockholder approval, no amendment shall be made which would have a material
adverse effect on the stockholders of FHP or the stockholders of PacifiCare
without the further approval of such stockholders. No waiver under the
Reorganization Agreement shall be effective, unless it is expressly set forth in
a written instrument duly executed and delivered.
83
<PAGE>
AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF PACIFICARE
The PacifiCare Certificate currently provides that, in the event of any
merger or consolidation of PacifiCare with or into another entity (including the
PacifiCare Merger), the holders of PacifiCare Class B Common Stock shall be
entitled to receive the same consideration per share as the consideration per
share received by any holder of PacifiCare Class A Common Stock in such merger
or consolidation.
Absent an amendment to the PacifiCare Certificate, the Mergers could not be
consummated and two classes of common stock could not be retained. As PacifiCare
does not intend, by virtue of the Mergers, to eliminate a capitalization
structure with two classes of common stock, the PacifiCare Amendment will permit
the Mergers to be consummated with a capitalization structure including two
classes of common stock, which will have rights substantially similar to those
currently accorded the PacifiCare Class A Common Stock and the PacifiCare Class
B Common Stock. See "Comparison of Rights of Stockholders -- Comparison of
Stockholder Rights with Respect to PacifiCare Holding and PacifiCare."
If the required vote of the holders of PacifiCare Common Stock is received,
pursuant to the PacifiCare Amendment, the PacifiCare Certificate will be amended
to provide that, in the event of a merger or consolidation of PacifiCare with or
into another entity (whether or not PacifiCare is the surviving entity), the
holders of PacifiCare Class B Common Stock shall be entitled to receive the same
per share consideration as the per share consideration, if any, received by any
holder of the PacifiCare Class A Common Stock in such merger or consolidation;
provided, however, that this restriction shall not apply to the transactions
contemplated by the Reorganization Agreement.
By approving the PacifiCare Amendment, the stockholders of PacifiCare will
also approve a change in the name of PacifiCare to "PacifiCare Operations, Inc."
PacifiCare Holding will be renamed "PacifiCare Health Systems, Inc." upon
consummation of the Mergers.
FOR THE REASONS DESCRIBED ABOVE, THE PACIFICARE BOARD OF DIRECTORS HAS
UNANIMOUSLY APPROVED THE PACIFICARE AMENDMENT AND RECOMMENDS THAT PACIFICARE
STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE PACIFICARE AMENDMENT.
84
<PAGE>
AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF FHP
The FHP Certificate provides that, following a "change of control" (as
defined in the FHP Certificate), FHP is required to offer to holders of FHP
Preferred Stock certain Special Conversion Rights with consideration different
than the Series A Merger Consideration offered to the holders of FHP Preferred
Stock pursuant to the Reorganization Agreement. See "The Mergers and Related
Transactions -- Merger Consideration."
The Board of Directors of FHP believes that the opportunity to receive the
Series A Merger Consideration pursuant to the Reorganization Agreement is in the
best interests of the holders of FHP Preferred Stock. The Series A Merger
Consideration, consisting of $14.113 in cash, 0.50 shares of PacifiCare Holding
Preferred and Talbert Rights, is anticipated to have a higher value than the
Special Conversion Rights unless the trading price of the PacifiCare Holding
Class B Common following the Effective Time is below approximately $48 per share
(assuming the Average Closing Price of PacifiCare Class B Common Stock was at a
similar price).
In order for the holders of FHP Preferred Stock to receive the consideration
contemplated by the Reorganization Agreement in lieu of the consideration to
which such holders otherwise would be entitled, the FHP Board of Directors has
adopted an amendment to the FHP Certificate to: (i) exempt the FHP Merger from a
requirement of the existing FHP Certificate that, in the event of a merger or
consolidation of FHP, the holders of FHP Preferred Stock are entitled to receive
upon conversion thereof the same consideration per share as the consideration
they would have received in the event they converted their FHP Preferred Stock
into FHP Common Stock immediately prior to such merger or consolidation; and
(ii) provide that the holders of FHP Preferred Stock are not entitled to Special
Conversion Rights as a result of the FHP Merger.
The Board of Directors of FHP also negotiated for inclusion of the
Irrevocable Election in the Reorganization Agreement so that in the event the
Series A Amendment is not approved, individual holders of FHP Preferred Stock
could elect to receive the Series A Merger Consideration in lieu of the
consideration provided in the FHP Certificate.
For a discussion of the rights of the PacifiCare Holding Preferred, see
"Description of PacifiCare Holding Capital Stock -- PacifiCare Holding
Preferred," and for a comparison of the rights of the PacifiCare Holding
Preferred to the rights of the FHP Preferred Stock, see "Comparison of Rights of
Stockholders -- Comparison of Stockholder Rights with Respect to PacifiCare
Holding and FHP."
THE FHP BOARD OF DIRECTORS RECOMMENDS THAT FHP STOCKHOLDERS VOTE FOR
APPROVAL AND ADOPTION OF THE SERIES A AMENDMENT. THE AFFIRMATIVE VOTE OF THE
HOLDERS OF A MAJORITY OF THE OUTSTANDING FHP COMMON STOCK AND 66 2/3% OF THE
OUTSTANDING FHP PREFERRED STOCK IS REQUIRED FOR APPROVAL OF THIS PROPOSAL.
85
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Consolidated Statements Of
Income of PacifiCare Holding for the fiscal year ended September 30, 1995 and
the nine months ended June 30, 1996 present results for PacifiCare Holding as if
the Acquisitions had occurred on October 1, 1994 and 1995, respectively. The
accompanying Unaudited Pro Forma Condensed Consolidated Balance Sheet for
PacifiCare Holding as of June 30, 1996 gives effect to the Mergers as if they
had occurred on June 30, 1996.
The FHP Merger will be accounted for under the purchase method of
accounting. Accordingly, the amount of the consideration to be paid in the FHP
Merger will be allocated to assets acquired and liabilities assumed based on
their estimated fair values. The excess of such consideration over the estimated
fair value of such assets and liabilities has been preliminarily allocated to
certain identifiable intangible assets and goodwill. The purchase price
allocation may be adjusted upon completion of the final valuations of FHP's
assets and liabilities and the effect of any such adjustment is not expected to
be significant. The PacifiCare Merger will be treated as a reorganization with
no change in the recorded amount of PacifiCare's assets and liabilities. See
"The Mergers and Related Transactions -- Accounting Treatment." The Unaudited
Pro Forma Condensed Consolidated Financial Statements do not give effect to any
synergies which may be realized as a result of the Mergers. See "The Merger and
Related Transactions -- Estimated Synergies." The Unaudited Pro Forma Condensed
Consolidated Financial Statements do not include the pro forma effect of the
Talbert Rights Offering. Additionally, except as indicated in the notes thereto,
the Unaudited Pro Forma Condensed Consolidated Financial Statements do not
reflect any nonrecurring/unusual restructuring charges that may be incurred as a
result of the integration of FHP. The amount of such charges cannot be
reasonably determined at this time.
The Unaudited Pro Forma Condensed Consolidated Financial Statements are
provided for informational purposes only and do not purport to present the
combined financial position or results of operations of PacifiCare and FHP had
the Mergers and the 1995 Acquisitions assumed therein occurred on the dates
specified, nor are they necessarily indicative of the results of operations that
may be expected in the future.
PacifiCare currently reports its financial information on the basis of a
September 30 fiscal year. FHP currently reports its financial information on the
basis of a June 30 fiscal year. The Unaudited Pro Forma Condensed Consolidated
Financial Statements for the fiscal year ended September 30, 1995 include
PacifiCare's historical results of operations for the fiscal year ended
September 30, 1995 and FHP's historical results of operations for the fiscal
year ended June 30, 1995. The PacifiCare and FHP Unaudited Pro Forma Condensed
Consolidated Financial Statements for the nine months ended June 30, 1996
include the historical results of operations of both PacifiCare and FHP for the
nine months ended June 30, 1996. The Unaudited Pro Forma Condensed Consolidated
Financial Statements include the historical balance sheets of both PacifiCare
and FHP as of June 30, 1996.
The stock consideration portion of the purchase price assumed a market price
for PacifiCare Class A Common Stock of $71.00 and an Average Closing Price of
PacifiCare Class B Common Stock of $74.00. The Reorganization Agreement provides
for an adjustment to the number of shares to be issued to the stockholders of
FHP if the Average Closing Price of PacifiCare Class B Common Stock is less than
$62.90 or greater than $73.10. The increases in the market price for PacifiCare
Class A Common Stock and the Average Closing Price of PacifiCare Class B Common
Stock (from assumed values of $67.00 and $68.00, respectively) resulted in (i)
the issuance of 479,000 fewer shares of PacifiCare Holding Class B Common Stock,
(ii) additional pro forma purchase price consideration of $38.6 million, and
(iii) had the effect of reducing pro forma earnings per share by $0.01 for the
nine months ended June 30, 1996 and had no effect on pro forma earnings per
share for the fiscal year ended September 30, 1995. The Final Class A/Common
Share Ratio and Final Class B/Common Share Ratio and the conversion ratio with
respect to the PacifiCare Holding Preferred will be based upon the Average
Closing Price of the PacifiCare Class B Common Stock calculated at the Effective
Time. The purchase price used to calculate goodwill will be based on the trading
prices of PacifiCare Holding Class A Common and PacifiCare Holding Class B
Common following the Effective Time.
The Unaudited Pro Forma Condensed Consolidated Financial Statements should
be read in conjunction with: (i) such historical financial statements, and the
notes thereto, which are included in or incorporated by reference in this Joint
Proxy Statement/Prospectus; (ii) the selected historical financial data
appearing elsewhere in this Joint Proxy Statement/Prospectus; and (iii) the
unaudited selected pro forma financial information and unaudited comparative per
share data, including the notes thereto, appearing elsewhere in this Joint Proxy
Statement/Prospectus. See "Incorporation of Certain Documents by Reference,"
"Available Information," "Summary -- Selected Historical and Pro Forma Financial
and Operating Data," "Summary -- Comparative Per Share Data," and "FHP
International Corporation Consolidated Financial Statements."
86
<PAGE>
PACIFICARE HOLDING
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
PACIFICARE
1995 PRO FORMA HOLDING, AS
PACIFICARE FHP ACQUISITIONS ADJUSTMENTS (A) ADJUSTED (O)
------------- ------------- ----------- -------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total operating revenue.............. $ 3,731,022 $ 3,909,380 $ 70,662 $ -- $ 7,711,064
Expenses:
Health care services............... 3,077,135 3,238,489 58,284 -- 6,373,908
Marketing, general and
administrative expenses........... 498,445 490,196 10,906 -- 999,547
Amortization of intangibles........ 7,199 31,506 237 31,396(b) 70,338
Disposition and restructuring
charges........................... -- 75,110 -- -- 75,110
------------- ------------- ----------- -------------- -------------
Operating income..................... 148,243 74,079 1,235 (31,396) 192,161
Interest income...................... 39,406 32,079 371 (3,940)(c) 67,916
Interest expense..................... (5,549) (25,972) (234) (78,320)(d) (110,075)
------------- ------------- ----------- -------------- -------------
Income before income taxes........... 182,100 80,186 1,372 (113,656) 150,002
Provision for income taxes........... 74,005 42,894 418 (38,767)(e) 78,550
------------- ------------- ----------- -------------- -------------
Net income........................... 108,095 37,292 954 (74,889) 71,452
Preferred stock dividends............ -- 25,337 -- (14,819)(f) 10,518
------------- ------------- ----------- -------------- -------------
Net income attributable to common
stock............................... $ 108,095 $ 11,955 $ 954 $ (60,070) $ 60,934
------------- ------------- ----------- -------------- -------------
------------- ------------- ----------- -------------- -------------
Weighted average common shares and
equivalents outstanding used to
calculate earnings per share........ 29,864 41,057 40,955(i)
------------- ------------- -------------
------------- ------------- -------------
Earnings per share attributable to
common stock........................ $ 3.62 $ 0.29 $ 1.49
------------- ------------- -------------
------------- ------------- -------------
Ratio of earnings to fixed charges
(m)................................. 2.2x
-------------
-------------
Ratio of earnings to fixed charges
and preferred stock dividends (n)... 1.9x
-------------
-------------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
87
<PAGE>
PACIFICARE HOLDING
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
PACIFICARE
PRO FORMA HOLDING, AS
PACIFICARE FHP ADJUSTMENTS (A) ADJUSTED (O)
------------- ------------- -------------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total operating revenue........................ $ 3,416,212 $ 3,174,651 $ -- $ 6,590,863
Expenses:
Health care services......................... 2,855,936 2,681,112 -- 5,537,048
Marketing, general and administrative
expenses.................................... 425,147 361,577 -- 786,724
Amortization of intangibles.................. 6,904 23,910 22,097(b) 52,911
Disposition and restructuring charges........ 17,147 3,900 -- 21,047
OPM reserve charge........................... 25,000 45,000 -- 70,000
------------- ------------- -------------- -----------------
Operating income............................... 86,078 59,152 (22,097) 123,133
Interest income................................ 34,749 27,038 61,787
Interest expense............................... (1,737) (14,717) (58,740)(d) (75,194)
------------- ------------- -------------- -----------------
Income before income taxes..................... 119,090 71,473 (80,837) 109,726
Provision for income taxes..................... 50,664 41,247 (27,648)(e) 64,263
------------- ------------- -------------- -----------------
Net income..................................... 68,426 30,226 (53,189) 45,463
Preferred stock dividends...................... -- 19,818 (11,929)(f) 7,889
------------- ------------- -------------- -----------------
Net income attributable to common stock........ $ 68,426 $ 10,408 $ (41,260) $ 37,574
------------- ------------- -------------- -----------------
------------- ------------- -------------- -----------------
Weighted average common shares and equivalents
outstanding used to calculate earnings per
share......................................... 31,654 41,928 42,745(i)
------------- ------------- -----------------
------------- ------------- -----------------
Earnings per share attributable to common
stock......................................... $ 2.16 $ 0.25 $ 0.88
------------- ------------- -----------------
------------- ------------- -----------------
Ratio of earnings to fixed charges (m)......... 2.2x
-----------------
-----------------
Ratio of earnings to fixed charges and
preferred stock dividends (n)................. 1.8x
-----------------
-----------------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
88
<PAGE>
PACIFICARE HOLDING
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
<TABLE>
<CAPTION>
PACIFICARE
PRO FORMA HOLDING, AS
PACIFICARE FHP ADJUSTMENTS (A) ADJUSTED (N)
------------- ------------- -------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents............................ $ 154,461 $ 166,873 $ -- $ 321,334
Marketable securities........................... 522,061 187,919 -- 709,980
Receivables, net................................ 139,494 141,537 -- 281,031
Prepaid expenses................................ 4,708 33,736 -- 38,444
Deferred income taxes........................... 28,773 49,162 -- 77,935
------------- ------------- -------------- -------------
Total current assets........................ 849,497 579,227 -- 1,428,724
Property, plant and equipment, net................ 95,270 231,428 (20,000)(g) 306,698
Assets held for sale.............................. -- 16,470 -- 16,470
Long term investments............................. -- 36,470 -- 36,470
Marketable securities -- restricted............... 24,416 90,499 -- 114,915
Goodwill and intangible assets.................... 289,189 1,028,374 1,211,275(h) 2,528,838
Other assets...................................... 6,285 31,411 -- 37,696
------------- ------------- -------------- -------------
$ 1,264,657 $ 2,013,879 $ 1,191,275 $ 4,469,811
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical claims and benefits payable............. $ 273,800 $ 367,872 $ -- $ 641,672
Accounts payable and accrued liabilities........ 149,586 216,712 105,300(j) 471,598
Unearned premium revenue........................ 16,426 24,713 -- 41,139
Long-term debt due within one year.............. 6,200 30,097 -- 36,297
------------- ------------- -------------- -------------
Total current liabilities................... 446,012 639,394 105,300 1,190,706
Long-term debt due after one year................. 5,555 104,184 1,014,127(k) 1,123,866
Other liabilities................................. -- 102,672 -- 102,672
Minority interest................................. 392 -- -- 392
Deferred income taxes............................. -- -- 129,110(h) 129,110
Shareholders' equity:
Preferred shares................................ -- 1,052 (947)(l) 105
Common shares................................... 312 2,039 (1,931)(l) 420
Additional paid-in capital...................... 364,053 938,478 171,676(l) 1,474,207
Unrealized holding gain (loss) on
available-for-sale securities, net of taxes.... 684 (2,306) 2,306(h) 684
Retained earnings............................... 447,649 228,366 (228,366)(h) 447,649
------------- ------------- -------------- -------------
Total shareholders' equity.................. 812,698 1,167,629 (57,262) 1,923,065
------------- ------------- -------------- -------------
$ 1,264,657 $ 2,013,879 $ 1,191,275 $ 4,469,811
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
89
<PAGE>
PACIFICARE HOLDING
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(a) INTEGRATION SYNERGIES. PacifiCare Holding believes it will achieve synergies
from the integration of the Acquisitions by eliminating redundant
administrative costs and using its greater purchasing power to achieve lower
health care and general and administrative costs. The anticipated impact of
such synergies has not been reflected in the unaudited pro forma condensed
consolidated statements of income. The Unaudited Pro Forma Condensed
Consolidated Financial Statements do not reflect any nonrecurring/unusual
restructuring charges that may be incurred as a result of the integration of
FHP.
(b) AMORTIZATION OF INTANGIBLES. Pro forma adjustment to reflect amortization of
approximately $118.7 million and $2.2 billion relating to the 1995
Acquisitions and the Mergers, respectively, of the excess of the purchase
price over the estimated fair value of the net assets acquired using a range
of estimated useful lives for identifiable intangible assets of 20 to 40
years and a 40 year useful life for goodwill (36 year average useful life
relating to the Mergers assuming first year amortization of $61.3 million;
see Note (h)).
(c) INTEREST INCOME. Pro forma adjustment to reflect the reduction of interest
income from the beginning of the pro forma period assuming cash payments for
the 1995 Acquisitions of $121.7 million were made on October 1, 1994. The
interest income is assumed to be earned at an average rate of 7.0 percent
for the fiscal year ended September 30, 1995.
(d) INTEREST EXPENSE. Pro forma adjustment to reflect additional interest
expense on assumed borrowings under the Credit Facility to finance the Cash
Consideration portion of the Mergers at the weighted average interest rate
of approximately 7.50 percent for the fiscal year ended September 30, 1995
and for the nine months ended June 30, 1996. The pro forma adjustment
assumes interest only payments during the first year following the Effective
Time.
(e) INCOME TAXES. Pro forma adjustment to reflect the tax effects of the
Acquisitions and related non-deductible goodwill amortization at the
statutory rates in effect during the fiscal year ended September 30, 1995
and the nine months ended June 30, 1996 (in thousands).
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1995 JUNE 30, 1996
------------------ -------------
<S> <C> <C>
Pro forma adjustments to income before income taxes.................. $ 113,656 $ 80,837
Increase in non-deductible goodwill amortization..................... 17,221 12,061
---------- -------------
96,435 68,776
Statutory tax rate................................................... 40.2% 40.2%
---------- -------------
Pro forma adjustment................................................. $ 38,767 $ 27,648
---------- -------------
---------- -------------
</TABLE>
(f) PREFERRED STOCK DIVIDENDS. Pro forma adjustment to reflect a reduction in
dividend payments as a result of the conversion of FHP Preferred Stock into
cash and PacifiCare Holding Preferred to be issued pursuant to the Mergers
assuming approval of the Series A Amendment and issuance of such shares on
October 1, 1994 and 1995.
(g) PROPERTY, PLANT AND EQUIPMENT. Pro forma adjustment to conform FHP's
accounting policies with those of PacifiCare's related to expensing rather
than capitalizing costs relating to purchased and internally developed
software. This adjustment is reflected in goodwill and intangible assets
(see Note (h)).
(h) GOODWILL AND INTANGIBLE ASSETS. Pro forma adjustment to record the Mergers
and reflect the excess of the purchase price over the net assets acquired
and the related deferred tax effect. The purchase price assumed (i) a market
price of $71.00 and $74.00 for the PacifiCare Holding Class A
90
<PAGE>
PACIFICARE HOLDING
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and Class B Common, respectively, (ii) approval of the Series A Amendment,
(iii) the exercise of FHP Options resulting in the issuance of 0.9 million
shares of FHP Common Stock and the receipt of $19.6 million in cash
proceeds. The purchase price allocation is based on currently available
information and may be adjusted upon completion of the final valuations of
FHP's assets and liabilities. Based on current information, PacifiCare
Holding does not expect the final purchase price allocation to be materially
different from that assumed in the Unaudited Pro Forma Condensed
Consolidated Balance Sheet (in thousands).
<TABLE>
<S> <C> <C>
Purchase price consideration (1)............................... $2,124,494
Direct transaction costs....................................... 105,300
----------
Total purchase price........................................... 2,229,794
Less FHP shareholders' equity as follows:
Preferred shares........................................... 1,052
Common shares.............................................. 2,039
Additional paid-in capital................................. 938,478
Unrealized holding loss on available-for-sale securities,
net of taxes.............................................. (2,306)
Retained earnings.......................................... 228,366
----------
1,062,165
Plus: FHP goodwill and intangible assets....................... 1,028,374
Conforming accounting adjustments (see Note (g))........... 20,000
----------
Acquisition cost in excess of net assets acquired.............. $2,110,539
----------
----------
Allocation of acquisition cost in excess of net assets
acquired:
Allocation to identifiable intangible assets:
Employer groups............................................ $ 225,370
Provider networks.......................................... 84,500
Bank fees.................................................. 11,300
-----------
Subtotal................................................... $ 321,170
Allocation to goodwill:
Goodwill, before deferred tax adjustment................... 1,789,369
Less FHP goodwill.......................................... 1,028,374
-----------
Subtotal................................................... 760,995
Pro forma increase in deferred tax liability due to step up
in identifiable intangible assets......................... 129,110
----------
Pro forma increase in goodwill............................. 890,105
----------
Net pro forma adjustment to goodwill and intangible assets... $1,211,275
----------
----------
</TABLE>
91
<PAGE>
PACIFICARE HOLDING
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) The purchase price consideration was derived as follows, using FHP share
and option data as of November 8, 1996 and assuming the Series A
Amendment is approved (in thousands, except per share data):
<TABLE>
<CAPTION>
PREFERRED COMMON
SHARES SHARES
----------- -----------
<S> <C> <C> <C>
Cash Consideration:
FHP shares outstanding........................................... 21,036 41,215
FHP Options assumed exercised.................................... -- 888
----------- -----------
FHP total equivalent shares outstanding.......................... 21,036 42,103
Cash conversion price............................................ $ 14.113 $ 17.50
----------- -----------
Cash portion of purchase price, before proceeds from FHP Options
assumed exercised............................................... $ 296,881 $ 736,803
Proceeds from FHP Options assumed exercised...................... -- 19,557
----------- -----------
Total cash consideration....................................... $ 296,881 $ 717,246 $ 1,014,127
----------- -----------
----------- -----------
Stock Consideration:
PacifiCare Holding Class A Common shares issued.................. 2,350
Assumed Closing Price of PacifiCare Holding Class A Common....... $ 71
-----------
Total PacifiCare Holding Class A Common value.................. 166,850
FHP Common equivalent shares outstanding......................... 42,103
Assumed Final Class B/Common Share Ratio......................... 0.200
-----------
PacifiCare Holding Class B Common shares issued.................. 8,441
Assumed Closing Price of PacifiCare Holding Class B Common....... $ 74
-----------
Total PacifiCare Holding Class B Common value.................. 624,611
FHP Preferred shares outstanding................................. 21,036
Assumed PacifiCare Holding Preferred consideration............... $ 15.16
-----------
Total PacifiCare Holding Preferred value....................... 318,906
-------------
Total purchase price consideration............................... $ 2,124,494
-------------
-------------
</TABLE>
If the holders of the FHP Preferred Stock do not approve the Series A
Amendment, each such holder who does not make an Irrevocable Election as
to all of its shares of FHP Preferred Stock will receive certain Special
Conversion Rights. If such holders waive the Special Conversion Rights,
they will receive the consideration they would have received had the FHP
Preferred Stock been converted into FHP Common Stock immediately prior to
the Mergers. If the Series A Amendment is not approved (and no
Irrevocable Elections are made), PacifiCare Holding would issue an
additional 4.3 million shares of PacifiCare Holding Class B Common. This
would have the effect of reducing earnings per share to $1.35 and $0.80
for the fiscal year ended September 30, 1995 and the nine months ended
June 30, 1996, respectively. There would be no effect on the purchase
price.
If the Series A Amendment is not approved, each share of FHP Preferred
Stock as to which an Irrevocable Election is made would be exchanged for
the Series A Merger Consideration.
92
<PAGE>
PACIFICARE HOLDING
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In this event, PacifiCare Holding would issue fewer than the additional
4.3 million shares of PacifiCare Holding Class B Common issuable assuming
the Series A Amendment is not approved (and no Irrevocable Elections are
made).
If the holders of the FHP Preferred Stock do not approve the Series A
Amendment, each such holder who does not make an Irrevocable Election as
to all of its shares of FHP Preferred and who does elect to exercise its
Special Conversion Rights would be entitled to receive for each such
share of FHP Preferred Stock as to which an Irrevocable Election has not
been made (i) a mix of cash, PacifiCare Holding Class A Common and
PacifiCare Holding Class B Common determined by a formula described in
this Joint Proxy Statement/Prospectus; or (ii) $25.00 in cash. PacifiCare
Holding will have the right to pay any holder who elects the
consideration described in clause (i) of the previous sentence $25.00 in
cash per share despite their election. If the Series A Amendment is not
approved, no Irrevocable Elections are made and all holders of FHP
Preferred Stock elect to exercise their Special Conversion Rights for all
of their shares, the aggregate purchase price consideration for the FHP
Preferred Stock would not exceed $527 million. Since the consideration to
the holders of FHP Preferred Stock in such instance would be
significantly less than the consideration they would receive (i) assuming
the Series A Amendment is approved, (ii) assuming the Series A Amendment
is not approved and Irrevocable Elections are made or (iii) assuming the
Series A Amendment is not approved and the holders of FHP Preferred Stock
do not exercise their Special Conversion Rights, the pro forma effect of
the alternatives relating to an exercise of Special Conversion Rights are
not presented herein.
(i) COMMON SHARES AND EQUIVALENTS OUTSTANDING. The pro forma adjustment reflects
the following events related to the FHP Merger for the fiscal year ended
September 30, 1995 and the nine months ended June 30, 1996, as more
specifically described below.
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1995 JUNE 30, 1996
------------------ -------------
(IN THOUSANDS)
<S> <C> <C>
PacifiCare weighted average common shares and equivalents outstanding...... 29,864 31,654
Issuance of PacifiCare Holding Class A Common.............................. 2,350 2,350
Issuance of PacifiCare Holding Class B Common.............................. 8,441 8,441
Conversion of FHP Options to PacifiCare Holding Options upon consummation
of the Mergers, based on the treasury stock method........................ 300 300
------- -------------
PacifiCare Holding weighted average shares and equivalents outstanding, as
adjusted.................................................................. 40,955 42,745
------- -------------
------- -------------
</TABLE>
- ------------------------
No conversion of the PacifiCare Holding Preferred is assumed.
(j) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES. Pro forma adjustment to reflect
estimated transaction costs (see Note (h)).
(k) LONG-TERM DEBT DUE AFTER ONE YEAR. Pro forma adjustment to reflect assumed
borrowings under the Credit Facility to finance the Cash Consideration
portion of the Mergers (see Note (d)).
93
<PAGE>
PACIFICARE HOLDING
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(l) SHAREHOLDERS' EQUITY. Pro forma adjustment to reflect issuance of stock as a
result of the Mergers (see Note (h)).
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PREFERRED PAID-IN
STOCK STOCK CAPITAL TOTAL
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Issuance of PacifiCare
Holding Class A Common................................... $ 24 $ 166,826 $ 166,850
Issuance of PacifiCare
Holding Class B Common................................... 84 624,527 624,611
Issuance of PacifiCare
Holding Preferred........................................ $ 105 318,801 318,906
Cancellation of FHP Capital Stock.......................... (2,039) (1,052) (938,478) (941,569)
--------- --------- ------------ ------------
Pro forma adjustment....................................... $ (1,931) $ (947) $ 171,676 $ 168,798
--------- --------- ------------ ------------
--------- --------- ------------ ------------
</TABLE>
(m) RATIO OF EARNINGS TO FIXED CHARGES. For purposes of computing the ratio of
earnings to fixed charges, earnings include income before fixed charges,
provision for Federal and state income taxes and minority interests. Fixed
charges consist of interest expense, including amortization of deferred
financing costs and the interest component of capitalized leases, and the
portion of operating lease expense which management believes is
representative of the interest component of rental expenses.
(n) RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS. For
purposes of computing the ratio of earnings to fixed charges and preferred
stock dividends, earnings include income before fixed charges, provision for
Federal and state income taxes and minority interests. Fixed charges and
preferred stock dividends consist of preferred stock dividends, interest
expense, including amortization of deferred financing costs and the interest
component of capitalized leases, and the portion of operating lease expense
which management believes is representative of the interest component of
rental expenses.
(o) PRO FORMA EFFECT OF TALBERT RIGHTS OFFERING. FHP has negotiated a written
agreement with Talbert, under which all Talbert-contracted medical providers
or sites agree to provide professional services to members of HMOs and
enrollees in insurance products of PacifiCare Holding and its subsidiaries
in exchange for a negotiated Capitation Fee (the "Capitated Talbert
Contract"). In addition, FHP shall enter into an agreement for FHP to render
certain administrative services (primarily related to certain information
systems) for a period not to exceed one year following the Effective Time at
a rate and on other terms approved by PacifiCare Holding. Following the
execution of the Capitated Talbert Contract, FHP will capitalize Talbert to
increase its net worth to approximately $60 million.
FHP will distribute, as soon as practicable and legally permissible after
the Effective Time, to holders of FHP Common Stock and FHP Preferred Stock
as of immediately prior to the Effective Time, one Talbert Right for each
21.34381 shares of FHP Common Stock and one Talbert Right for each 26.46474
shares of FHP Preferred Stock held on the Talbert Rights Record Date,
subject to adjustment to reflect any additional shares of FHP Capital Stock
issued prior to the Effective Time. Pursuant to the Talbert Rights Offering,
holders of Talbert Rights may purchase one share of Talbert Common Stock for
each Talbert Right held for the subscription price of $21.50 per share.
Holders of Talbert Rights will be entitled to subscribe for all, or any
portion of, the shares of Talbert Common Stock underlying their Talbert
Rights.
94
<PAGE>
PACIFICARE HOLDING
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Proceeds from the exercise of the Talbert Rights, to the extent subscribed,
will be used to repay the note payable to FHP. There can be no assurance
that the Talbert Rights Offering will be partially or fully subscribed. The
unaudited pro forma financial information does not include the pro forma
effect of the Talbert Rights Offering and the Capitated Talbert Contract.
See "The Mergers and Related Transactions -- Talbert Rights Offering."
95
<PAGE>
DESCRIPTION OF PACIFICARE HOLDING CAPITAL STOCK
THE FOLLOWING DESCRIPTION OF THE PACIFICARE HOLDING CAPITAL STOCK IS
QUALIFIED IN ITS ENTIRETY BY THE COMPLETE TEXT OF THE RESTATED CERTIFICATE,
WHICH IS INCORPORATED BY REFERENCE HEREIN AND A COPY OF WHICH IS ANNEXED TO THIS
JOINT PROXY STATEMENT/PROSPECTUS AS EXHIBIT 1.4 TO APPENDIX A.
The authorized capital stock of PacifiCare Holding immediately prior to the
Effective Time will consist of 100,000,000 shares of PacifiCare Holding Class A
Common, par value $0.01 per share, 100,000,000 shares of PacifiCare Holding
Class B Common, par value $0.01 per share, and 40,000,000 shares of PacifiCare
Holding Preferred, par value $0.01 per share.
PACIFICARE HOLDING CLASS A COMMON AND CLASS B COMMON
DIVIDENDS. Subject to the rights of any outstanding preferred stock, each
holder of PacifiCare Holding Common shall be entitled to share equally, on a per
share basis, in dividends, when, as and if declared by the Board of Directors of
PacifiCare Holding, out of funds legally available therefor, except that
dividends or other distributions payable on the PacifiCare Holding Common in
PacifiCare Holding Common shall be made to all holders of PacifiCare Holding
Common and may be made: (i) in PacifiCare Holding Class B Common to the record
holders of PacifiCare Holding Class A Common and to the record holders of
PacifiCare Holding Class B Common; (ii) in PacifiCare Holding Class A Common to
the record holders of PacifiCare Holding Class A Common and in PacifiCare
Holding Class B Common to the record holders of PacifiCare Holding Class B
Common; or (iii) in any other authorized class or series of capital stock to the
holders of both classes of PacifiCare Holding Common.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
PacifiCare Holding, the holders of PacifiCare Holding Common shall, subject to
the rights of any outstanding shares of preferred stock, share equally and
ratably in all assets available for distribution to PacifiCare Holding
stockholders.
VOTING RIGHTS. Each holder of PacifiCare Holding Class A Common shall be
entitled to one vote for each share of PacifiCare Holding Class A Common
standing in such holder's name on the stock transfer records of PacifiCare
Holding in connection with the election of directors and all other actions
submitted to a vote of stockholders. The holders of PacifiCare Holding Class B
Common shall not vote on any matters except as otherwise provided by the
Restated Certificate and the DGCL.
The holders of PacifiCare Holding Class B Common shall be entitled to vote
separately as a group only with respect to: (i) proposals to change the par
value of the PacifiCare Holding Class B Common; (ii) amendments to the Restated
Certificate that alter or change the powers, preferences or special rights of
the holders of PacifiCare Holding Class B Common so as to affect them adversely;
and (iii) such other matters as may require separate group voting under the
Restated Certificate or the DGCL. The number of shares of authorized PacifiCare
Holding Class B Common 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 PacifiCare Holding Class A Common.
Under the Restated Certificate, certain transactions known as Business
Transactions (as defined below) involving a Control Person (as defined below)
must be approved by the affirmative vote of the holders of 66 2/3% of the total
votes entitled to be cast in an election of directors; provided, however, that
the foregoing shall not apply if (i) the Business Transaction was approved by a
two-thirds vote of the Board of Directors of PacifiCare Holding prior to the
acquisition by the Control Person, together with its affiliates and associates,
of stock of PacifiCare Holding, which, in the aggregate, bears the rights to 10%
or more of the total votes entitled to be cast in an election of directors; or
(ii) the Business Transaction was approved by a two-thirds vote of the Board of
Directors of PacifiCare Holding after the acquisition by the Control Person,
together with its affiliates and associates, of stock of PacifiCare Holding,
which, in the aggregate, bears the rights to 10% or more of the total votes
entitled to be cast in an election of directors, and such acquisition by such
Control Person and its affiliates and associates was unanimously approved by the
Board of Directors of PacifiCare Holding; or (iii) the Business Transaction is
solely between PacifiCare Holding and another corporation, 50% or more of the
voting
96
<PAGE>
stock of which is owned by PacifiCare Holding and none of which is owned by a
Control Person, and each holder of stock of PacifiCare Holding receives the same
type of consideration in proportion to such holder's holdings; or (iv) 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 stock of PacifiCare Holding is not less than the
higher of (1) the highest price per share (including brokerage commissions,
soliciting dealers' fees, dealer-management compensation, and other expenses,
including, but not limited to, newspaper advertisements, printing and attorney's
fees) paid by such Control Person in acquiring any of its holdings of PacifiCare
Holding's stock, or (2) the highest per share market price of the stock of
PacifiCare during the 3-month period immediately preceding the date of the proxy
statement described in the following clause (b); and (b) a proxy statement
responsive to the requirements of the Exchange Act shall be mailed to public
stockholders of PacifiCare Holding 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 of
PacifiCare Holding, or any of them, may choose to state, and, if deemed
advisable by a majority of the continuing directors of PacifiCare Holding, 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 PacifiCare Holding (such investment banking
firm to be selected by a majority of the continuing directors of PacifiCare
Holding and to be paid a reasonable fee for their services by PacifiCare Holding
upon receipt of such opinion). A "Control Person" is generally defined as a
person or entity, or group of persons or entities, who owns or has the right to
control 10% of the total votes entitled to be cast in an election of directors.
A "Business Transaction" is generally defined as a transaction involving the
merger with, the sale or lease of assets to or from, the issuance of securities
to or purchase of securities from, or plan of dissolution of PacifiCare Holding
by, any Control Person.
CONVERSION. All outstanding PacifiCare Holding Class B Common shall be
converted into PacifiCare Holding Class A Common on a share-for-share basis by
the Board of Directors if, as a result of the existence of the PacifiCare
Holding Class B Common, either the PacifiCare Holding Class A Common or
PacifiCare Holding Class B Common or both are excluded from trading on the NYSE,
the American Stock Exchange and all other principal national securities
exchanges then in use and also is excluded from quotation on the Nasdaq National
Market and other comparable national quotation systems then in use. In making
such determination, the PacifiCare Holding Board of Directors may conclusively
rely on any information or documentation available to it, including filings,
made with the 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. All outstanding PacifiCare
Holding Class B Common shall be converted into PacifiCare Holding Class A Common
on a share-for-share basis if at any time the number of shares of outstanding
PacifiCare Holding Class A Common, as reflected on the stock transfer records of
PacifiCare Holding, falls below 10% of the aggregate number of outstanding
PacifiCare Holding Class A Common and of PacifiCare Holding Class B Common. In
the event of any conversion of the PacifiCare Holding Class B Common as
described in this paragraph, certificates which formerly represented outstanding
shares of PacifiCare Holding Class B Common will thereafter be deemed to
represent a like number of shares of PacifiCare Holding Class A Common and all
authorized PacifiCare Holding Common shall consist of only PacifiCare Holding
Class A Common.
CLASS B COMMON SHARE PROTECTION PROVISION. The PacifiCare Holding
Certificate of Incorporation suspends the voting rights of any person or group
that acquires a beneficial interest of 10% or more of the then outstanding
PacifiCare Holding Class A Common (excluding shares acquired at the Effective
Time and upon issuance or sale by the Company, by operation of law, by will or
the laws of descent or distribution, by gift or by foreclosure of a bona fide
loan), unless such person or group (a "Significant Stockholder") then
beneficially owns an equal or greater percentage of the outstanding PacifiCare
Holding Class B Common acquired after the Effective Time, or such Significant
Stockholder makes a tender offer for sufficient PacifiCare Holding Class B
Common to reach such a level of
97
<PAGE>
ownership. This provision also applies when a Significant Stockholder acquires
the next higher integral multiple of 5% (e.g. 15%, 20%, 25%, etc.) of the
outstanding PacifiCare Holding Class A Common.
MERGER. In the event of a merger or consolidation of PacifiCare Holding
with or into another entity (whether or not PacifiCare Holding is the surviving
entity), the holders of PacifiCare Holding Class B Common shall be entitled to
receive the same per share consideration as the per share consideration, if any,
received by any holder of the PacifiCare Holding Class A Common in such merger
or consolidation; provided, however, that this restriction shall not apply to
the PacifiCare Merger.
PACIFICARE HOLDING PREFERRED
If the Series A Amendment is approved, a class of PacifiCare Holding
Preferred shall be designated "Series A Cumulative Convertible Preferred
Shares," with 11,000,000 shares authorized and the following rights,
preferences, privileges and powers:
RANK. The PacifiCare Holding Preferred shall rank, with respect to dividend
rights and rights on liquidation, winding-up and dissolution of PacifiCare
Holding: (i) senior to all classes of common stock of PacifiCare Holding, as
they exist on the date the Restated Certificate is filed or as such stock may be
constituted from time to time, and each other class or series of capital stock
or preferred stock established by the PacifiCare Holding Board of Directors to
the extent the terms of such stock do not expressly provide that it ranks senior
to or on a parity with the PacifiCare Holding Preferred as to dividend rights
and rights on liquidation, winding-up and dissolution (collectively, together
with the PacifiCare Holding Common, the "Junior Securities"); (ii) on a parity
with each other class or series of capital stock or of preferred stock issued by
PacifiCare Holding established by the PacifiCare Holding Board of Directors to
the extent the terms of such stock expressly provide that it will rank on a
parity with the PacifiCare Holding Preferred as to dividend rights and rights on
liquidation, winding-up and dissolution (collectively, the "Parity Securities");
and (iii) junior to each other class of capital stock or series of preferred
stock established by the Board to the extent the terms of such stock expressly
provide that it will rank senior to the PacifiCare Holding Preferred as to
dividend rights and rights on liquidation, winding-up and dissolution
(collectively, the "Senior Securities"). Each share of the PacifiCare Holding
Preferred shall rank equally in all respects with each other share of the
PacifiCare Holding Preferred.
DIVIDENDS. Holders of PacifiCare Holding Preferred will be entitled to
receive, when, as and if declared by the PacifiCare Holding Board of Directors
out of funds of PacifiCare Holding legally available therefor, cash dividends at
an annual rate of $1.00 per share of PacifiCare Holding Preferred, payable
quarterly in arrears on March 15, June 15, September 15, and December 15, of
each year, commencing with the first dividend date following the Mergers;
provided that the dividend payable on the first dividend date following the
Mergers shall be in an amount determined by assuming that the PacifiCare Holding
Preferred (i) had been outstanding on the date immediately following the last
dividend payment date on the FHP Preferred Stock (the "Transition Period
Commencement Date"); and (ii) had been entitled to receive, when, as and if
declared by the Board of Directors out of funds of PacifiCare Holding legally
available therefor, cash dividends at an annual rate of (a)$2.50 per share from
such date through the date of consummation of the Mergers and (b)$1.00 per share
from the date immediately following the date of the Mergers through the first
dividend date following the Mergers. Each dividend will be payable to holders of
record as they appear on the books of PacifiCare Holding at the close of
business on a record date, not more than 60 nor less than 15 days before the
payment date, fixed by the PacifiCare Holding Board of Directors. Dividends will
be cumulative from the date of consummation of the Mergers (the Transition
Period Commencement Date for the first dividend). Dividends for each full
dividend period will be computed by dividing the annual dividend rate by four
and dividends payable for any period less than a full dividend period will be
computed on the basis of a 360-day year consisting of twelve 30-day months. The
PacifiCare Holding Preferred will not be entitled to any dividends, whether
payable in cash, property or stock, in excess of full cumulative dividends. No
interest, or sum of money in lieu of interest, will be payable in respect of any
accrued and unpaid dividends. No dividends may be paid or set apart for such
payment, or other distributions
98
<PAGE>
made on Junior Securities (except dividends on Junior Securities paid in
additional shares of Junior Securities), and no PacifiCare Holding Preferred,
Parity Securities or Junior Securities may be repurchased, redeemed or otherwise
retired directly or indirectly by PacifiCare Holding, if full cumulative
dividends to be paid hereunder prior to the date thereof have not been paid on
the PacifiCare Holding Preferred. Notwithstanding the foregoing, PacifiCare
Holding may: (i) make redemptions, purchases or other acquisitions of PacifiCare
Holding Preferred, Parity Securities or Junior Securities payable in Junior
Securities or repurchases of PacifiCare Holding Preferred, Parity Securities or
Junior Securities in the ordinary course of business pursuant to the terms of
any current or future employee stock incentive plan or similar plan adopted by
the PacifiCare Holding Board of Directors; and (ii) make redemptions of Rights
(as defined below in "-- Conversion") distributed pursuant to a Rights Agreement
(as defined in "-- Conversion").
LIQUIDATION RIGHTS. The "Stated Value" of each share of PacifiCare Holding
Preferred shall be $25.00. In the event of any voluntary or involuntary
liquidation, dissolution or winding-up of PacifiCare Holding, after satisfaction
of the claims of creditors and any holders of Senior Securities and before any
payment or distribution of assets is made on any Junior Securities, including,
without limitation, the PacifiCare Holding Common, the holders of PacifiCare
Holding Preferred shall receive a liquidation preference equal to the Stated
Value of their shares, and shall be entitled to receive an amount equal to all
accrued and unpaid dividends through the date of distribution (whether or not
declared). After payment of any such liquidation preference and accrued but
unpaid dividends, the PacifiCare Holding Preferred will not be entitled to any
further participation in any distribution of assets by PacifiCare Holding.
Neither the sale or transfer of all or any part of the assets of PacifiCare
Holding for cash, securities or other property, nor the merger or consolidation
of PacifiCare Holding into or with any other corporation or a merger of any
other corporation with or into PacifiCare Holding, will be deemed to be a
liquidation, dissolution or winding-up of PacifiCare Holding.
VOTING RIGHTS. Except as provided below or as may be required by the DGCL
or provided by the resolution creating any other series of PacifiCare Holding
Preferred, the holders of PacifiCare Holding Preferred will not be entitled to
vote. So long as any shares of PacifiCare Holding Preferred are outstanding, the
vote or consent of the holders of 66 2/3% of the outstanding shares of
PacifiCare Holding Preferred, voting together as a single class, shall be
necessary to: (i) increase or decrease the par value of the shares of PacifiCare
Holding Preferred; (ii) alter or change the powers, preferences or special
rights of the shares of PacifiCare Holding Preferred so as to affect them
adversely; or (iii) authorize or issue any class or series of Parity Securities
or Senior Securities, or any security convertible into Parity Securities or
Senior Securities.
In the event that any accrued dividends (whether or not declared) on the
PacifiCare Holding Preferred shall not have been paid in an aggregate amount
equal to or greater than six quarterly dividends, the maximum authorized number
of directors of PacifiCare Holding will be automatically increased by two, and
holders of PacifiCare Holding Preferred shall be entitled to vote their shares
of PacifiCare Holding Preferred, to elect, as a class, an additional two
directors. So long as any shares of PacifiCare Holding Preferred shall be
outstanding, the holders of shares of PacifiCare Holding Preferred shall retain
the right to vote and elect, with the holders of Parity Securities upon which
like voting rights have been conferred and are exercisable (the "Voting Parity
Securities"), as a class, two directors until all accrued but unpaid dividends
on the PacifiCare Holding Preferred are paid in full or declared and set aside
for payment.
Unless and until the holders of PacifiCare Holding Preferred and Voting
Parity Securities shall have exercised their right to elect two directors voting
as a class, the holders of PacifiCare Holding Class A Common, and other classes
of stock of PacifiCare Holding, if applicable, shall continue to be entitled to
elect all of the directors.
CONVERSION. Each share of PacifiCare Holding Preferred will be convertible
(the rights to convert described in this section are referred to as the
"Conversion Rights") at the option of the holder thereof, into such number of
fully paid and non-assessable shares of PacifiCare Holding Class B
99
<PAGE>
Common (together with any Rights (as defined below) associated therewith) as is
equal to (i) the sum of (a) twice the Stated Value of the PacifiCare Holding
Preferred plus (b) accrued but unpaid dividends in arrears thereon to which the
holder converting such shares is entitled, divided by (ii) the Conversion Price
then in effect. The initial "Conversion Price" for the PacifiCare Holding
Preferred shall be a price equal to $31.00 multiplied by a fraction, the
numerator of which is 1.00 and the denominator of which is the Final Exchange
Ratio and shall be subject to adjustment as described below (the "PacifiCare
Holding Conversion Price"). Shares of PacifiCare Holding Preferred called for
redemption will not be convertible after the close of business on the day
preceding the date fixed for redemption, unless PacifiCare Holding defaults in
payment of the redemption price.
The Conversion Price is subject to adjustment after the issuance of the
PacifiCare Holding Preferred from time to time as follows: (i) in case
PacifiCare Holding shall (a) pay a dividend or make a distribution on PacifiCare
Holding Common in shares of PacifiCare Holding Common, (b) subdivide its
outstanding shares of PacifiCare Holding Common into a greater number of shares
or (c) combine its outstanding shares of any class of PacifiCare Holding Common
into a smaller number of shares, the Conversion Price in effect immediately
prior to such action shall be adjusted (and any other appropriate action taken
by PacifiCare Holding) so that the holder of any PacifiCare Holding Preferred
thereafter surrendered for conversion shall be entitled to receive the number of
shares of PacifiCare Holding Common which such holder would have been entitled
to receive immediately following such action had the holder's PacifiCare Holding
Preferred been converted immediately prior thereto; (ii) in case PacifiCare
Holding shall issue rights, options or warrants to all holders of its
outstanding shares of PacifiCare Holding Common, or of its outstanding shares of
any class or series of PacifiCare Holding Common, entitling them, for a period
expiring within 45 days after the record date mentioned below, to subscribe for
or purchase shares of PacifiCare Holding Common at a price per share less than
the Current Market Price per share (as defined in the Restated Certificate) of
such offered PacifiCare Holding Common on the record date mentioned below, then
the Conversion Price in effect immediately prior thereto shall be adjusted as
provided in the Restated Certificate.
Notwithstanding the immediately preceding paragraph, any adjustments to the
Conversion Price to account for the issuance of rights ("Rights") under a
stockholder rights plan or agreement, "poison pill" or similar arrangement (a
"Rights Agreement") adopted subsequent to the date hereof shall be made when
such Rights become exercisable or exchangeable by the holder thereof for
PacifiCare Holding Common (PacifiCare Holding Common issued pursuant to the
exercise of, or exchange by PacifiCare Holding for, such Rights are referred to
as "Rights Stock") pursuant to a Rights Agreement at a price per share less than
the Current Market Price per share of such PacifiCare Holding Common on the date
of such exercise or exchange. In such event, the Conversion Price in effect
immediately prior to such exercise or exchange shall be adjusted as provided in
the Restated Certificate.
In case PacifiCare Holding shall distribute to substantially all holders of
PacifiCare Holding Common, or to substantially all holders of its outstanding
shares of any class or series of PacifiCare Holding Common, evidences of
indebtedness, equity securities (including equity interests in PacifiCare
Holding's subsidiaries) other than PacifiCare Holding Common or other assets
(other than cash dividends paid out of earned surplus of PacifiCare Holding or,
if there shall be no earned surplus, out of net profits for the fiscal year in
which the dividend is made and/or the preceding fiscal year), or shall
distribute to substantially all holders of PacifiCare Holding Common or to
substantially all holders of any class or series of PacifiCare Holding Common,
rights, options or warrants to subscribe to securities (other than any rights,
options or warrants referred to above or Rights referred to above), then in each
such case the Conversion Price shall be adjusted as provided in the Restated
Certificate.
No adjustment in the Conversion Price shall be required if the holders of
PacifiCare Holding Preferred are to participate in the transaction on a basis
and with notice that the PacifiCare Holding Board of Directors determines in
good faith to be fair and appropriate in light of the basis and notice on which
holders of PacifiCare Holding Common participate in the transaction.
100
<PAGE>
To the extent permitted by law, PacifiCare Holding from time to time may
reduce the Conversion Price by any amount for any period of at least 20 days (or
such other period as may then be required by applicable law) if the PacifiCare
Holding Board of Directors has made a determination in good faith that such
reduction would be in the best interests of PacifiCare Holding, which
determination shall be conclusive. No reduction in the Conversion Price pursuant
to this paragraph shall become effective unless PacifiCare Holding shall have
mailed a notice, at least 15 days prior to the date on which such reduction is
scheduled to become effective, to each holder of PacifiCare Holding Preferred.
At its option, PacifiCare Holding may make such reduction in the Conversion
Price, in addition to those otherwise required by this section, as the
PacifiCare Holding Board of Directors deems advisable to avoid or diminish any
income tax to holders of PacifiCare Holding Common resulting from any dividend
or distribution of stock (or rights to acquire stock) or from any event treated
as such for income tax purposes; provided that any such reduction shall not be
effective until written evidence of the action of the PacifiCare Holding Board
of Directors authorizing such reduction shall be filed with the Secretary of
PacifiCare Holding and notice thereof shall have been given by first-class mail,
postage prepaid, to each holder of PacifiCare Holding Preferred at such holder's
address as it appears on the books of PacifiCare Holding.
If any transaction shall occur, including without limitation: (i) any
recapitalization or reclassification of shares of PacifiCare Holding Common or
any class or series of PacifiCare Holding Common (other than a change in par
value, or from par value to no par value, or from no par value to par value, or
as a result of a subdivision or combination of the PacifiCare Holding Common);
(ii) any consolidation or merger of PacifiCare Holding with or into another
person or any merger of another person into PacifiCare Holding (other than a
merger in which PacifiCare Holding is the surviving corporation and that does
not result in a reclassification, conversion, exchange or cancellation of
PacifiCare Holding Common, or any class or series of PacifiCare Holding Common);
(iii) any sale, lease or transfer of all or substantially all of the assets of
PacifiCare Holding; (iv) any compulsory share exchange; or (v) any conversion of
all of the outstanding PacifiCare Holding Class B Common into PacifiCare Holding
Class A Common, pursuant to any of which holders of PacifiCare Holding Class B
Common shall be entitled to receive other securities, cash or other property,
then appropriate provision shall be made so that the holder of each share of
PacifiCare Holding Preferred then outstanding shall have the right thereafter to
receive on account of such share only the kind and amount of the securities,
cash or other property that would have been receivable upon such
recapitalization, reclassification, consolidation, merger, sale, lease,
transfer, share exchange or conversion by a holder of the number of shares of
PacifiCare Holding Class B Common issuable upon conversion of such share of
PacifiCare Holding Preferred immediately prior to such recapitalization,
reclassification, consolidation, merger, sale, lease, transfer or share
exchange, and PacifiCare Holding shall not enter into any such merger,
consolidation, sale, lease, transfer or share exchange unless the company formed
by such consolidation or resulting from such merger or that acquires such assets
or that acquires PacifiCare Holding's shares, as the case may be, shall make
provisions in its certificate or articles of incorporation or other constituent
document or certificate of merger or other document effecting any such merger,
consolidation, sale, lease, transfer or share exchange to establish such right.
Upon the occurrence of any transaction described in the preceding sentence
(except clause (i) thereof), the PacifiCare Holding Preferred then outstanding
shall be deemed converted, subject nevertheless to the provisions discussed in
"-- Change in Control" below, to the extent applicable.
ADOPTION OF RIGHTS AGREEMENT. PacifiCare Holding shall not adopt a Rights
Agreement unless such Rights Agreement shall provide that: (i) each holder of a
share of PacifiCare Holding Preferred shall be entitled to receive thereunder,
upon conversion of such share of PacifiCare Holding Preferred (in accordance
with the terms hereof), prior to the earlier to occur of (a) the date of
redemption of Rights issued under such Rights Agreement, (b) the date of
expiration of the Rights issued under such Rights Agreement or (c) the date the
Conversion Price of the PacifiCare Holding Preferred is adjusted to account for
the issuance of Rights, Rights in an amount equal to the amount of Rights issued
with respect to the number of shares of PacifiCare Holding Common to be received
upon such conversion; and (ii) if such Rights are redeemed prior to the
conversion of any share of PacifiCare Holding
101
<PAGE>
Preferred into PacifiCare Holding Common, then, upon conversion of such share of
PacifiCare Holding Preferred, the holder thereof shall receive an amount in cash
equal to the amount in cash that such holder would have received had he
converted such share of PacifiCare Holding Preferred prior to such redemption.
OPTIONAL REDEMPTION. On or after June 17, 1998, PacifiCare Holding may, at
its option, redeem all or from time to time any part of the shares of PacifiCare
Holding Preferred, out of funds legally available therefor, upon giving a notice
of redemption as set forth below, at the following redemption prices per share
(expressed as percentages of the Stated Value), plus an amount equal to accrued
and unpaid dividends, if any (whether or not declared), up to but excluding the
date fixed for redemption, if redeemed during the twelve-month period commencing
on June 17 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- --------------------------------------------------------------------------------- -------------
<S> <C>
1998............................................................................. 103.0%
1999............................................................................. 102.5%
2000............................................................................. 102.0%
2001............................................................................. 101.5%
2002............................................................................. 101.0%
2003............................................................................. 100.5%
2004............................................................................. 100.0%
</TABLE>
If fewer than all of the outstanding shares of the PacifiCare Holding
Preferred are to be redeemed, the number of shares to be redeemed shall be
determined by the PacifiCare Holding Board of Directors in good faith and the
shares to be redeemed will be determined PRO RATA as nearly as practicable, or
by such other method as the PacifiCare Holding Board of Directors may determine
to be fair and appropriate. PacifiCare Holding Preferred may not be redeemed
unless full cumulative dividends have been paid on the PacifiCare Holding
Preferred for all past dividend periods.
CHANGE IN CONTROL. If there occurs a Change in Control (as defined below)
with respect to PacifiCare Holding, then each share of PacifiCare Holding
Preferred may be converted (the rights to convert described in this Section
referred to as the "Special Conversion Rights"), at the option of the holder
thereof at any time from the date of such Change in Control until the expiration
of 55 days after the date of the Conversion Notice (as defined below) by
PacifiCare Holding to all holders of the PacifiCare Holding Preferred, into, at
its option, either: (i) such number of fully paid and non-assessable shares of
PacifiCare Holding Class B Common as is equal to the Stated Value of the
PacifiCare Holding Preferred divided by the Special Conversion Price (as defined
below); or (ii) an amount in cash equal to the Stated Value of the PacifiCare
Holding Preferred plus an amount equal to any accrued but unpaid dividends
thereon. The "Special Conversion Price" shall be the closing price of the
PacifiCare Holding Class B Common on the last trading day prior to the date
PacifiCare Holding gives the Conversion Notice to the holders of PacifiCare
Holding Preferred. Within five days after the occurrence of a Change in Control,
PacifiCare Holding shall give notice of the occurrence of the Change in Control
and of the Special Conversion Rights set forth herein in accordance with the
procedures set forth below to each holder of PacifiCare Holding Preferred.
Exercise of the Special Conversion Rights by a holder of PacifiCare Holding
Preferred will be irrevocable. PacifiCare Holding shall not enter into any
consolidation, merger or sale of assets, unless in connection therewith, the
holders of PacifiCare Holding Preferred exercising Special Conversion Rights
will be entitled to receive the same consideration as received for the number of
shares of PacifiCare Holding Class B Common into which their shares of
PacifiCare Holding Preferred would have been converted pursuant to the Special
Conversion Rights. The Special Conversion Rights are in addition to the regular
Conversion Rights that apply to the PacifiCare Holding Preferred. PacifiCare
Holding may, at its option, elect to pay holders of PacifiCare Holding Preferred
exercising Special Conversion Rights an amount in cash equal to the Stated Value
of the PacifiCare Holding Preferred plus an amount equal to any accrued but
unpaid dividends thereon.
102
<PAGE>
"Change in Control" means any of the following: (i) the sale, lease,
conveyance or other disposition of all or substantially all of PacifiCare
Holding's assets as an entirety or substantially as an entirety to any person or
"group" (within the meaning of Section 13(d)(3) of the Exchange Act) in one or a
series of transactions, provided that a transaction where the holders of
PacifiCare Holding Common immediately prior to such transaction own, directly or
indirectly, 50% or more of the common stock of such person or group immediately
after such transactions shall not be a Change in Control; (ii) the acquisition
by PacifiCare Holding and/or any of its subsidiaries of 50% or more of the
aggregate voting power of the PacifiCare Holding Common in one transaction or a
series of related transactions; (iii) the liquidation or dissolution of
PacifiCare Holding, provided that a liquidation or dissolution of PacifiCare
Holding which is part of a transaction or series of related transactions that
does not constitute a Change in Control under the "provided"' clause of clause
(i) above shall not constitute a Change in Control under this clause (iii); or
(iv) any transaction or series of transactions (as a result of a tender offer,
merger, consolidation or otherwise) that results in, or that is in connection
with, (a) any person, including a "group" (within the meaning of Section
13(d)(3) of the Exchange Act) that includes such person, acquiring "beneficial
ownership" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of 50% or more of the aggregate voting power of the PacifiCare
Holding Common or any person that possesses "beneficial ownership" (as defined
in Rule 13d-3 under the Exchange Act), directly, of 50% or more of the aggregate
voting power of the PacifiCare Holding Common, or (b) less than 50% (measured by
the aggregate voting power of all classes) of PacifiCare Holding Common being
registered under Section 12(b) or 12(g) of the Exchange Act.
103
<PAGE>
COMPARISON OF RIGHTS OF STOCKHOLDERS
COMPARISON OF STOCKHOLDER RIGHTS WITH RESPECT TO PACIFICARE HOLDING AND
PACIFICARE
The rights of PacifiCare's stockholders are governed by the PacifiCare
Certificate, PacifiCare's bylaws and the DGCL. After the Effective Time, the
rights of PacifiCare stockholders who become PacifiCare Holding stockholders
will be governed by the Restated Certificate, PacifiCare Holding's bylaws and
the DGCL. The following is a summary comparison of certain differences between
the rights of PacifiCare stockholders under the PacifiCare Certificate and the
rights of PacifiCare Holding stockholders under the Restated Certificate. Except
as described in the next sentence, PacifiCare Holding has adopted bylaws
substantially identical to those of PacifiCare and, consequently, no differences
arise in the rights of a stockholder under PacifiCare's bylaws as compared to
the rights of a stockholder under PacifiCare Holding's bylaws. Unlike the bylaws
of PacifiCare, PacifiCare Holding, under its bylaws, is required to reimburse
the expenses of a director incurred in connection with certain litigation or
other disputes relating to his or her status as a director, subject to repayment
to PacifiCare Holding in the event the director is determined not to be entitled
to indemnification by PacifiCare Holding. This summary does not purport to be
complete and is qualified in its entirety by reference to the Restated
Certificate, the PacifiCare Holding Bylaws and the PacifiCare Certificate.
COMPARISON OF THE RIGHTS OF THE HOLDERS OF PACIFICARE COMMON STOCK AND THE
HOLDERS OF
PACIFICARE HOLDING COMMON
REMOVAL OF DIRECTORS. A director of PacifiCare can be removed prior to the
expiration of his or her term by either: (i) the affirmative vote or written
consent of the holders of at least 66 2/3% of the total number of votes entitled
to vote in an election of directors; or (ii) unanimous vote of the remaining
directors if such director has been declared of unsound mind by a court of law
or convicted of a felony. The Restated Certificate does not provide for removal
by unanimous vote of the remaining directors but does provide for the removal by
the affirmative vote or written consent of the holders of 66 2/3% of the total
number of votes entitled to vote in an election of directors.
EXISTENCE OF SENIOR PREFERRED STOCK. Under the PacifiCare Certificate,
there is no series of capital stock issued or outstanding with rights,
preferences or privileges senior to the PacifiCare Common Stock. If the Series A
Amendment is approved, 11,000,000 shares of PacifiCare Holding Preferred will be
authorized under the Restated Certificate and it is anticipated that almost all
of these shares could be issued in the FHP Merger (the exact number of shares to
be issued being dependent upon whether the Series A Amendment is approved, the
number of shares of FHP Preferred Stock, if any, converted into FHP Common Stock
prior to the Effective Time, the number of shares, if any, of FHP Preferred
Stock whose holders exercise appraisal rights and the number of shares of FHP
Preferred Stock for which proper Irrevocable Elections are made). The holders of
the PacifiCare Holding Preferred will have rights, preferences and privileges
which are senior to the holders of PacifiCare Holding Common, including, without
limitation, a preferential cumulative dividend of $1.00 per share and a
liquidation preference of $25.00 per share. The material rights, preferences and
privileges of the PacifiCare Holding Preferred are described under "Description
of PacifiCare Holding Capital Stock -- PacifiCare Holding Preferred."
With the exception of the differences summarized above with respect to the
PacifiCare Common Stock and PacifiCare Holding Common, there are no material
differences between: (i) the rights of the holder of PacifiCare Class A Common
Stock and the holders of the PacifiCare Holding Class A Common Stock; and (ii)
the rights of the holders of PacifiCare Class B Common Stock and the holders of
PacifiCare Holding Class B Common.
COMPARISON OF STOCKHOLDER RIGHTS WITH RESPECT TO PACIFICARE HOLDING AND FHP
The rights of FHP's stockholders are governed by the FHP Certificate, FHP's
bylaws and the DGCL. After the Effective Time, the rights of FHP stockholders
who become PacifiCare Holding stockholders will be governed by the Restated
Certificate, PacifiCare Holding's bylaws and the DGCL. The following is a
summary comparison of certain differences between the rights of FHP stockholders
under the FHP Certificate and the FHP bylaws and the rights of PacifiCare
Holding stockholders
104
<PAGE>
under the Restated Certificate, and PacifiCare Holding's bylaws. This summary
does not purport to be complete and is qualified in its entirety by reference to
the Restated Certificate, the FHP Certificate and the bylaws of PacifiCare
Holding and FHP.
COMPARISON OF THE RIGHTS OF THE HOLDERS OF FHP COMMON STOCK AND THE HOLDERS
OF
PACIFICARE HOLDING CLASS A COMMON
GENERAL. In accordance with the terms of the FHP Merger, each share of FHP
Common Stock shall be converted into the right to receive a fraction of a share
of PacifiCare Holding Class A Common and a fraction of a share of PacifiCare
Holding Class B Common. With the exception of the differences set forth below
under the captions "Approval of Certain Transactions" and "Ability to Call
Special Stockholder Meetings" there are no material differences between the
rights of the FHP Common stockholders and the PacifiCare Holding Class A Common
stockholders.
APPROVAL OF CERTAIN TRANSACTIONS. Under the FHP Certificate, the
affirmative vote of the holders of 66 2/3% of the outstanding voting capital
stock of FHP is required for the approval or authorization of any: (i) merger or
consolidation of FHP with or into any other corporation; or (ii) sale, lease,
exchange or disposition of all or substantially all of the assets of FHP to or
with any other corporation, person or entity, unless such transaction is
approved by a resolution adopted by 80% of the FHP Board of Directors. Under the
Restated Certificate, certain transactions known as Business Transactions
involving a Control Person must be approved by the affirmative vote of the
holders of 66 2/3% of the total votes entitled to be cast in an election of
directors. A "Control Person" is generally defined as a person or entity, or
group of persons or entities, who owns or has the right to control 10% of the
total votes entitled to be cast in an election of directors. A "Business
Transaction" is generally defined as a transaction involving the merger with,
the sale or lease of assets to or from, the issuance of securities to or
purchase of securities from, or plan of dissolution of PacifiCare Holdings by,
any Control Person.
ABILITY TO CALL SPECIAL STOCKHOLDER MEETINGS. Under FHP's bylaws, a special
meeting of the stockholders may be called by (i) the Chairman of the Board or
(ii) by resolution adopted by a majority of the total number of authorized
directors. The stockholders of FHP do not have a right to call a special meeting
of stockholders. Under the PacifiCare Holding bylaws, a special meeting of
stockholders may be called by (i) the President, (ii) the President and
Secretary upon the written request of a majority of the Board of Directors, or
(iii) the written request of stockholders holding a majority of the capital
stock of PacifiCare Holding issued and outstanding and entitled to vote.
COMPARISON OF THE RIGHTS OF THE HOLDERS OF FHP COMMON STOCK AND HOLDERS OF
PACIFICARE HOLDING CLASS B COMMON
VOTING RIGHTS. The holders of FHP Common Stock have the right to one vote
per share of FHP Common Stock on each matter presented to the stockholders,
including the election of directors. The holders of PacifiCare Holding Class B
Common are not entitled to vote their shares of PacifiCare Holding Class B
Common, except with respect to: (i) proposals to change the par value of the
PacifiCare Holding Class B Common; (ii) amendments to the Restated Certificate
that alter or change the powers, preferences or special rights of the holders of
PacifiCare Holding Class B Common so as to affect them adversely; and (iii) such
other matters that may require group voting under the Restated Certificate and
under the DGCL.
CONVERSION RIGHTS. The FHP Common Stock is not convertible. The PacifiCare
Holding Class B Common converts into PacifiCare Class A Common only in the
following circumstances: (i) the Board of Directors of PacifiCare Holding
determines that either the PacifiCare Holding Class A Common or the PacifiCare
Holding Class B Common, or both, are excluded from trading on all national stock
exchanges and national quotation system as a result of the existence of the
PacifiCare Holding Class B Common; or (ii) the number of shares at PacifiCare
Holding Class A Common, as reflected on PacifiCare Holding's stock transfer
records, falls below 10% of the aggregate of PacifiCare Holding Class A and
Class B outstanding.
105
<PAGE>
CLASS B COMMON SHARE PROTECTION PROVISION. The Restated Certificate
provides that, if a person, entity or group acquires 10% or more of the
PacifiCare Holding Class A Common and does not own an equal or greater
percentage of PacifiCare Holding Class B Common, then such person, entity or
group must also purchase an equivalent percentage of PacifiCare Holding Class B
Common (based on the outstanding PacifiCare Holding Class B Common less any
PacifiCare Holding Class B Common held by such person entity or group) or lose
the right to vote such shares. See "Description of PacifiCare Holding Capital
Stock -- PacifiCare Holding Class A Common and Class B Common -- Class B Common
Share Protection Provision."
COMPARISON OF THE RIGHTS OF FHP PREFERRED STOCKHOLDERS AND PACIFICARE
HOLDING PREFERRED STOCKHOLDERS
EXCHANGE RATIO. A holder of the FHP Preferred will be entitled to receive
0.50 shares of PacifiCare Holding Preferred for each share of FHP Preferred
Stock, if the required vote for the Series A Amendment is received or if such
holder makes a proper Irrevocable Election with respect to such share.
DIVIDEND RIGHTS. Under the FHP Certificate, the holders of FHP Preferred
Stock are entitled to receive, when, as and if declared by the Board of
Directors of FHP out of funds of FHP legally available therefore, cash dividends
at the annual rate of $1.25 per share, payable quarterly in arrears on March 15,
June 15, September 15 and December 15. Under the Restated Certificate, the
holders of PacifiCare Holding Preferred are entitled to receive, when, as and if
declared by the PacifiCare Holding Board of Directors out of funds of PacifiCare
Holding legally available therefore, cash dividends at the annual rate of $1.00
per share payable quarterly in arrears on March 15, June 15, September 15 and
December 15. The dividend for the period commencing on the date immediately
after the last dividend payment date on the FHP Preferred Stock before the
Effective Time through the first dividend payment date for the PacifiCare
Holding Preferred is set at a special rate.
CONVERSION. The FHP Preferred Stock is convertible, at the option of the
holder thereof, into such number of shares of FHP Common Stock (together with
any rights associated with such common stock) as is equal to (A) the sum of
$25.00 plus (ii) accrued but unpaid dividends, divided by (B) the conversion
price for the FHP Preferred Stock (the "FHP Conversion Price"). The initial FHP
Conversion Price is $31.00 and is subject to antidilution provisions in the FHP
Certificate. Accordingly, at the present time, each share of FHP Preferred Stock
is convertible at the option of the holder thereof (assuming no accrued but
unpaid dividends) into approximately 0.80645 shares of FHP Common Stock.
The PacifiCare Holding Preferred is convertible, at the option of the holder
thereof, into such number of shares of PacifiCare Holding Class B Common
(together with any rights associated with such common stock) as is equal to (i)
the sum of (a) $50.00 plus (b) accrued but unpaid dividends, divided by (ii) the
PacifiCare Holding Conversion Price. The initial PacifiCare Holding Conversion
Price is equal to the product of (1) $31.00 multiplied by (2) a fraction, the
numerator of which is $1.00 and the denominator of which is the Final Exchange
Ratio. See "The Merger and Related Transactions -- Merger Consideration" for the
calculation of the Final Exchange Ratio.
The following examples illustrate the calculation of the PacifiCare Holding
Conversion Price and the conversion of the PacifiCare Holding Preferred. These
examples are for illustration only and do not represent a prediction as to the
probable PacifiCare Holding Conversion Price at the Effective Time. The examples
assume no accrued but unpaid dividends.
If the Average Closing Price of PacifiCare Holding Class B Common were to be
$70.00, the Final Exchange Ratio will be 0.258, the PacifiCare Holding
Conversion Price will be approximately $120.155 and each PacifiCare Holding
Preferred stockholder will be entitled to convert one share of PacifiCare
Holding Preferred into approximately 0.416 shares of PacifiCare Holding Class B
Common.
106
<PAGE>
If the Average Closing Price of PacifiCare Holding Class B Common were to be
$55.00, the Final Exchange Ratio will be 0.273, the PacifiCare Holding
Conversion Price will be approximately $113.553 and each PacifiCare Holding
Preferred stockholder will be entitled to convert one share of PacifiCare
Preferred into approximately 0.440 shares of PacifiCare Holding Class B Common.
If the Average Closing Price of Class B Common were to be $80.00, the Final
Exchange Ratio will be .245, the PacifiCare Holding Conversion Price will be
approximately $126.531 and each PacifiCare Holding Preferred stockholder will be
entitled to convert one share of PacifiCare Holding Preferred into approximately
0.395 shares of PacifiCare Holding Class B Common.
The PacifiCare Holding Conversion Price is subject to antidilution
provisions in the Restated Certificate.
The FHP Preferred Stock is convertible into FHP Common Stock, a voting
stock, whereas, the PacifiCare Holding Preferred is convertible into PacifiCare
Holding Class B Common, a non-voting class of stock. See "-- Comparison of
Rights of the Holders of FHP Common Stock and Holders of PacifiCare Holding
Class B Common."
107
<PAGE>
MANAGEMENT OF PACIFICARE HOLDING
DIRECTORS
Upon consummation of the Mergers or within 60 days thereafter, the
PacifiCare Holding Board of Directors will consist of the members of the
PacifiCare Board of Directors immediately prior to the Effective Time and Jack
R. Anderson and Joseph F. Prevratil, current directors of FHP designated by the
FHP Board of Directors, and Craig T. Beam and Bradley C. Call, designated by the
PacifiCare Board of Directors. Current members of the PacifiCare Board of
Directors are indicated as such in the table below. The table below lists
individuals currently expected to become members of the PacifiCare Holding Board
of Directors.
CURRENT DIRECTORS OF PACIFICARE
<TABLE>
<CAPTION>
DIRECTOR POSITION WITH PACIFICARE (OTHER THAN AS A DIRECTOR), IF
NAME SINCE AGE ANY; PRINCIPAL OCCUPATION FOR PAST FIVE YEARS
- ------------------------------------ ----------- --- -----------------------------------------------------------
<S> <C> <C> <C>
Terry O. Hartshorn.................. 1985 51 Mr. Hartshorn has been Chairman of the PacifiCare Board of
Directors and President and Chief Executive Officer of
UniHealth since April 1993. Mr. Hartshorn served as
President and Chief Executive Officer of PacifiCare from
1976 to April 1993, and as Secretary and a director of
PacifiCare from 1977 to 1981. Mr. Hartshorn has served as a
Director of Apria HealthCare Group Inc., a provider of home
health care products and services, since 1991, and also as
a Director of Emcare Holdings Inc., a provider of emergency
department services, since November 1994. Mr. Hartshorn is
a member of the Executive and Nominating Committees of
PacifiCare.
Alan R. Hoops....................... 1994 49 Mr. Hoops has been President and Chief Executive Officer of
PacifiCare since April 1993. Mr. Hoops served as Executive
Vice President and Chief Operating Officer of PacifiCare
from 1986 to April 1993, as Secretary of PacifiCare from
1982 to April 1993, as Senior Vice President of PacifiCare
from 1985 to 1986 and as Vice President, Marketing and
Planning of PacifiCare from 1977 to 1985. Mr. Hoops is a
member of the Executive and Nominating Committees of
PacifiCare.
David R. Carpenter.................. 1989 57 Mr. Carpenter has been President of the Darcy Company, an
actuarial and insurance consulting company, since 1995. Mr.
Carpenter served as Executive Vice President of
Transamerica Corporation from 1993 through 1995, Group Vice
President of Transamerica Corporation from 1990 through
1993, Chairman from 1985 through 1995 and Chief Executive
Officer from 1984 through 1995 of Transamerica Occidental
Life Insurance Company. Mr. Carpenter has also been
Chairman of the UniHealth Board of Directors since 1994, an
Ex-Officio Member of the Compensation Committee of
UniHealth since 1994 and serves as Chairman of its
Executive and Nominating Committees and Governance
Subcommittee. Mr. Carpenter is
</TABLE>
108
<PAGE>
<TABLE>
<CAPTION>
DIRECTOR POSITION WITH PACIFICARE (OTHER THAN AS A DIRECTOR), IF
NAME SINCE AGE ANY; PRINCIPAL OCCUPATION FOR PAST FIVE YEARS
- ------------------------------------ ----------- --- -----------------------------------------------------------
Chairman of PacifiCare's Compensation and Nominating
Committees and is a member of its Executive Committee. Mr.
Carpenter has served as a Director of H.F. Ahmanson &
Company, parent of Home Savings of America, since 1995.
<S> <C> <C> <C>
Gary L. Leary....................... 1989 61 Mr. Leary has been Executive Vice President of UniHealth
since April 1992, General Counsel of UniHealth since 1988,
Director and member of the Executive Committee of UniHealth
since 1988, and Secretary of the UniHealth Board of
Directors since November 1994. Mr. Leary has served as
Corporate Counsel to UniHealth and its predecessor since
1977.
Warren E. Pinckert II............... 1985 52 Mr. Pinckert has been President, Chief Executive Officer
and a Director of Cholestech Corporation, a medical device
manufacturing firm, since June 1993. At Cholestech
Corporation Mr. Pinckert served as Executive Vice
President, Operations from 1991 to June 1993, Vice
President of Finance and Business Development from 1989 to
1991, and Secretary from 1989 to June 1993. Mr. Pinckert is
a member of the Compensation, Executive and Special
Committees of PacifiCare and is Chairman of its
Audit/Finance Committee. Mr. Pinckert is a certified public
accountant.
David A. Reed....................... 1992 63 Mr. Reed currently is the President of DAR Consulting Group
and serves as a special advisor to the Health Care Practice
Group of Deloitte & Touche LLP. Mr. Reed served as
President and Chief Executive Officer of St. Joseph Health
System, a nonprofit public benefit corporation, owning and
operating hospitals and other health care service entities,
from 1990 through December 1994. Mr. Reed is a former
chairman and speaker of the House of Delegates of the
American Hospital Association. Mr. Reed is a member of the
Audit and Special Committees of PacifiCare. Mr. Reed
recently has been elected to the Board of Directors of
Invitro International, a developer and distributor of in
vitro bioassay systems.
Lloyd E. Ross....................... 1985 55 Mr. Ross has been President and Chief Executive Officer of
SMI Construction, Inc., a commercial and industrial
building company, since 1976 and has been Vice President,
Division Manager of ARB, Inc., a construction company,
since February 1996. Mr. Ross is a member of the
Audit/Finance, Compensation and Special Committees of
PacifiCare.
</TABLE>
109
<PAGE>
<TABLE>
<CAPTION>
DIRECTOR POSITION WITH PACIFICARE (OTHER THAN AS A DIRECTOR), IF
NAME SINCE AGE ANY; PRINCIPAL OCCUPATION FOR PAST FIVE YEARS
- ------------------------------------ ----------- --- -----------------------------------------------------------
<S> <C> <C> <C>
Jean Bixby Smith.................... 1995 58 Ms. Smith has been President of Bixby Land Company since
January 1984 and President of Alamitos Land Company since
March 1991, both of which are engaged in the development
and management of commercial and industrial real estate.
Ms. Smith has also been a Director of UniHealth since 1988.
PROPOSED DIRECTORS OF PACIFICARE HOLDING
Jack R. Anderson.................... 71 Mr. Anderson joined the FHP Board of Directors in June
1994. He was elected Chairman of the FHP Board of Directors
in June 1995 and is a member of the FHP Executive
Committee. Mr. Anderson is also Chairman of the TMMC Board
of Directors. Mr. Anderson was Chairman of the Board of
Directors of TakeCare from 1988 to June of 1994. He has
been President of Calver Corporation, a health care
consulting and investing firm, and a private investor since
1982. Mr. Anderson currently serves on the Boards of
Directors of Horizon Mental Health Management, Inc. and
United Dental Care, Inc.
Craig T. Beam....................... 41 Mr. Beam has been President of Beam & Associates, a real
estate development and management company, including health
care project management, since 1981. Mr. Beam has served as
a director of UniHealth since 1993, is a fellow of the
National Health Foundation, past chairman and a member of
board of directors of Martin Luther Hospital since 1982 and
is past Chairman of the American Heart Association,
California affiliate.
Bradley C. Call..................... 53 Mr. Call has been President and Chief Executive Officer of
Klienhart Industries, Inc., the parent of aerospace
manufacturing, analysis and inspection entities since 1988
and a member of the board of directors of Klienhart
Industries, Inc. since 1988. Mr. Call has also served as a
member of the board of directors of UniHealth since 1995
and Northridge Hospital Medical Center since 1991.
</TABLE>
110
<PAGE>
<TABLE>
<CAPTION>
DIRECTOR POSITION WITH PACIFICARE (OTHER THAN AS A DIRECTOR), IF
NAME SINCE AGE ANY; PRINCIPAL OCCUPATION FOR PAST FIVE YEARS
- ------------------------------------ ----------- --- -----------------------------------------------------------
<S> <C> <C> <C>
Joseph F. Prevratil................. 58 Mr. Prevratil has been a member of the FHP Board of
Directors since 1991 and is Chairman of the FHP Executive
Committee and a member of the FHP Audit and Compensation
Committees. Mr. Prevratil also serves as a director and
Chief Executive Officer of FHP Foundation and as a director
of TMMC. From 1982 to 1988, Mr. Prevratil served as
President of Wrather Port Properties, Inc., an
entertainment and hotel complex that included the Queen
Mary oceanliner in Long Beach, California. In 1988 and 1989
he served as Executive Director of the Port of Long Beach.
From 1989 to 1993, Mr. Prevratil was President of his own
business, providing contracted consulting and management
services to the leisure-time industry and the Redevelopment
Agency of the City of Long Beach. In 1993, Mr. Prevratil
became President of the RMS Foundation, Inc., a nonprofit
corporation operating the Queen Mary oceanliner attraction.
</TABLE>
COMMITTEES OF THE PACIFICARE HOLDING BOARD OF DIRECTORS
Following the Mergers, the PacifiCare Holding Board of Directors will
establish such committees and designate members of such committees as it deems
appropriate; such committees may include, among others: (i) an executive
committee; (ii) an audit/finance committee; (iii) a compensation committee; and
(iv) a governance/nominating committee.
COMPENSATION OF DIRECTORS
It is anticipated that non-employee directors of PacifiCare Holding will be
compensated in a similar manner as the non-employee directors of PacifiCare are
compensated at the Effective Time. PacifiCare has a compensation package
consisting of cash compensation and stock options, which enhances its ability to
attract and retain the services of qualified and experienced non-employee
directors. Accordingly, PacifiCare Holding will adopt a compensation plan
similar to PacifiCare's at the Effective Time (the "PacifiCare Compensation
Plan"). Pursuant to the PacifiCare Compensation Plan, directors who are not
full-time employees of PacifiCare Holding or UniHealth receive, as compensation
for their services, an annual retainer of $25,000, $1,200 for each PacifiCare
Board of Directors meeting attended or each PacifiCare Board of Directors
committee meeting attended and a telephone meeting fee equal to one-half the fee
paid for a PacifiCare Board of Directors meeting or PacifiCare Board committee
meeting, as the case may be. The Chairman of the Board and Chairmen of
committees receive an additional 200% of the amount paid for attendance at
meetings for each PacifiCare Board of Directors committee meeting attended.
In addition, it is anticipated that non-employee directors of PacifiCare
Holding, who are not eligible to receive grants under an officer and employee
stock option plan of PacifiCare Holding, would be eligible to receive
non-qualified stock options to purchase shares of PacifiCare Holding Class B
Common under a plan to be adopted by PacifiCare Holding that will be similar in
all material respects to the PacifiCare Directors Stock Option Plan. See "Second
Amended PacifiCare Directors Plan."
111
<PAGE>
EXECUTIVE OFFICERS
Set forth below are the names and titles of the persons who are expected to
serve as executive officers of PacifiCare Holding following the Mergers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------------------------------
<S> <C> <C>
Terry Hartshorn..................... 51 Chairman of the Board
Alan Hoops.......................... 49 President and Chief Executive Officer
Jeffrey Folick...................... 49 Executive Vice President and Chief Operating Officer
Wayne Lowell........................ 41 Executive Vice President, Chief Administrative Officer and Chief
Financial Officer
Joseph Konowiecki................... 43 General Counsel and Secretary
Patrick Feyen....................... 40 Regional Vice President of the Southwest, President, PacifiCare of
Oklahoma, Inc. and President, PacifiCare of Texas, Inc.
Jon Wampler......................... 45 Regional Vice President of the West and President, PacifiCare of
California
Ronald Davis........................ 37 Senior Vice President, Operations
Mitchell Goodstein.................. 44 Senior Vice President, Health Care Economics
Wanda Lee........................... 55 Senior Vice President, Corporate Human Resources
Linda Lyons, M.D.................... 47 Senior Vice President, Health Services
Craig Schub......................... 41 Senior Vice President, Marketing and President, Secure Horizons USA,
Inc.
James Williams...................... 49 Senior Vice President and Chief Information Officer
William Young....................... 50 Senior Vice President, Corporate Marketing
Mary Langsdorf...................... 36 Vice President and Corporate Controller
</TABLE>
COMPENSATION OF EXECUTIVE OFFICERS
PacifiCare Holding has not yet paid any compensation to its Chief Executive
Officer or any of its other executive officers. The PacifiCare Holding Board of
Directors may rely on a compensation committee composed of non-employee members
of the PacifiCare Holding Board of Directors (the "PacifiCare Holding
Compensation Committee") to recommend the form and amount of compensation to be
paid to the executive officers of PacifiCare Holding. It is anticipated that
when the PacifiCare Holding Compensation Committee meets or determines such
compensation, the PacifiCare Holding Compensation Committee will generally
adhere to the PacifiCare compensation policies and philosophy that compensation
should reflect the value created for stockholders while supporting the business
strategies and long-range plans of PacifiCare Holding and the markets PacifiCare
Holding will serve. Accordingly, it is expected that a compensation program will
be developed with the following themes: (i) a compensation program that stresses
PacifiCare Holding's financial performance and individual performance; (ii) a
portion of compensation would be based on the achievement of specific
performance goals, with compensation being competitive with companies of similar
business structure, size, and marketplace orientation; and (iii) a program
designed to reward and retain executive officers over the long-term. On an
ongoing basis, subject to any existing employment agreements, the type and
amount of compensation to be paid by PacifiCare Holding to its officers will be
entirely discretionary and within the subjective judgment of the PacifiCare
Holding Compensation Committee.
For information concerning the compensation paid to the Chief Executive
Officer and the other four most highly compensated executive officers of
PacifiCare for the fiscal year ended September 30, 1995, see the 1996 Proxy
Statement for PacifiCare, the relevant portions of which are incorporated by
reference into PacifiCare's Form 10-K and Form 10-K/A for the fiscal year ended
September 30, 1995.
112
<PAGE>
OWNERSHIP OF PACIFICARE, FHP AND PACIFICARE HOLDING
PACIFICARE
The following table sets forth certain information as of October 31, 1996
regarding beneficial ownership of PacifiCare Class A Common Stock and PacifiCare
Class B Common Stock: (i) by each person known by PacifiCare to own beneficially
more than 5% of the outstanding shares of PacifiCare Class A Common Stock or
PacifiCare Class B Common Stock; (ii) by each of the current directors and named
executive officers (as defined in Item 402(a)(3) of Regulation S-K) of
PacifiCare; and (iii) by all of the PacifiCare's directors and executive
officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENT OF CLASS
CLASS A BENEFICIAL HOLDERS OWNED (1) BENEFICIALLY OWNED
- -------------------------------------------------------------- -------------------- -------------------
<S> <C> <C>
UniHealth .................................................... 5,910,000 47.7%
3400 Riverside Drive
Burbank, CA 91505
The Capital Group Companies, Inc. ............................ 1,272,100(2) 10.3
333 South Hope Street
Los Angeles, CA 90071
Massachusetts Financial Services ............................. 762,075(3) 6.2
500 Boylston Street
Boston, MA 02115
Terry Hartshorn............................................... 212,000(4)(5) 1.7
Alan Hoops.................................................... 190,000(4)(5) 1.5
David Carpenter............................................... 6,900(4)(5) *
Gary Leary.................................................... 6,900(4)(5) *
Warren Pinckert............................................... 10,500(4)(5) *
David Reed.................................................... 300(4)(5) *
Lloyd Ross.................................................... 1,500(4)(5) *
Jean Smith.................................................... 230(4) *
Jeffrey Folick................................................ 4,000(4)(5) *
Wayne Lowell.................................................. 18,800(4)(5) *
Craig Schub................................................... -- *
Roger Taylor, M.D. (6)........................................ -- *
Jon Wampler................................................... 7,250(4)(5) *
All Executive Officers and Directors as a group (22
persons)..................................................... 488,880 3.9
</TABLE>
- ------------------------
* Indicates beneficial ownership of less than 1.0%.
113
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENT OF CLASS
CLASS B BENEFICIAL HOLDERS OWNED (1) BENEFICIALLY OWNED
- -------------------------------------------------------------- -------------------- -------------------
<S> <C> <C>
The Capital Group Companies, Inc. ............................ 2,801,900(2) 14.8%
333 South Hope Street
Los Angeles, CA 90071
FMR Corp. .................................................... 2,401,900(8) 12.7
82 Devonshire Street
Boston, MA 02109
Massachusetts Financial Services ............................. 2,203,199(3) 11.7
500 Boylston Street
Boston, MA 02115
American Express Financial Advisor ........................... 1,065,000(7) 5.6
IDS Tower 10
Minneapolis, MN 55440
Terry Hartshorn............................................... 160,683(4)(5) *
Alan Hoops.................................................... 193,947(4)(5) 1.0
David Carpenter............................................... 9,900(4)(5) *
Gary Leary.................................................... 9,900(4)(5) *
Warren Pinckert............................................... 5,216(4)(5) *
David Reed.................................................... 1,700(4)(5) *
Lloyd Ross.................................................... 3,900(4)(5) *
Jean Smith.................................................... 425(4) *
Jeffrey Folick................................................ 76,500(4)(5) *
Wayne Lowell.................................................. 36,602(4)(5) *
Roger Taylor, M.D. (6)........................................ 1,431 *
Craig Schub................................................... 27,428(4)(5) *
Jon Wampler................................................... 31,794(4)(5) *
All Executive Officers and Directors as a group (22
persons)..................................................... 665,452 3.4
</TABLE>
- ------------------------
* Indicates beneficial ownership of less than 1.0%.
(1) Information with respect to beneficial ownership is based on information
furnished to PacifiCare by each person in this table and is reported in
accordance with the beneficial ownership rules of the Commission.
(2) Number of shares beneficially owned by The Capital Group Companies, Inc., a
registered investment advisor ("Capital Groups"), as of June 30, 1996,
according to a Schedule 13F filed with the Commission. Capital Groups may be
deemed a beneficial owner of shares of the PacifiCare Class A and Class B
Common Stock under Rule 13d-3 of the Exchange Act as a result of its
discretionary authority to dispose of the shares on behalf of its clients.
(3) Number of shares beneficially owned by Massachusetts Financial Services, a
registered investment advisor, as of June 30, 1996 according to a Schedule
13F filed with the Commission. Massachusetts Financial Services may be
deemed a beneficial owner of shares of the PacifiCare Class A and Class B
Common Stock under Rule 13d-3 of the Exchange Act as a result of its
discretionary authority to dispose of the shares on behalf of its clients.
(4) The stockholder has sole voting and dispositive power with respect to the
shares of PacifiCare Common Stock shown to be beneficially owned by the
stockholder. Individuals included in this table reside in states having
community property laws under which the spouse of the stockholder in whose
name the securities are registered, may be entitled to share in the
management of their community property, which may include the right to vote
or dispose of the shares of PacifiCare Common Stock.
114
<PAGE>
(5) Shares reported include options exercisable 60 days after September 1, 1996,
which are reported pursuant to Rule 13d-3(d)(1) under the Exchange Act.
(6) Dr. Taylor resigned as Executive Vice President and Chief Medical Officer of
PacifiCare effective as of June 28, 1996.
(7) Number of shares beneficially owned by American Express Financial Services,
a registered investment advisor ("American Express"), as of June 30, 1996
according to a Schedule 13F filed with the Commission. American Express may
be deemed a beneficial owner of shares of PacifiCare Class B Common Stock
under Rule 13d-3 of the Exchange Act as a result of its discretionary
authority to dispose of the shares on behalf of its clients.
(8) Number of shares beneficially owned by FMR Corp., the parent of Fidelity
Management & Research Company, a registered investment advisor ("Fidelity"),
as of October 9, 1996, according to a Schedule 13G filed with the
Commission. FMR Corp. may be deemed a beneficial owner of shares of
PacifiCare Class B Common Stock under Rule 13d-3 of the Exchange Act as a
result of Fidelity's discretionary authority to dispose of the shares on
behalf of its clients.
115
<PAGE>
FHP
The following tables set forth certain information regarding beneficial
ownership of FHP Common Stock and FHP Preferred Stock: (i) by each person known
by FHP to own beneficially more than 5% of the outstanding shares of FHP Common
Stock and FHP Preferred Stock; (ii) by each of the current directors and named
executive officers (as defined in Item 402(a)(3) of Regulation S-K) of FHP; and
(iii) by all of FHP's directors and executive officers as a group. The
information with respect to the directors and named executive officers is as of
October 31, 1996. The information with respect to 5% stockholders is as of June
30, 1996.
<TABLE>
<CAPTION>
PERCENT OF
CLASS NUMBER OF SHARES CLASS
OF BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER (1) SECURITIES OWNED (2) OWNED
- ---------------------------------------------------------------- ----------- --------------------- -------------
<S> <C> <C> <C>
Heine Securities Corporation.................................... Common 5,694,266(8) 13.8%
51 John F. Kennedy Parkway
Short Hills, NJ 07078
Neuberger & Berman L.P. ........................................ Common 4,001,346(8) 9.7
605 Third Avenue
New York, NY 10158
FHP International Corporation
Employee Stock Ownership Plan ................................ Common 3,206,629(9) 7.8
3120 Lake Center Drive
Santa Ana, CA 92704
The Capital Group Companies, Inc. .............................. Common 3,238,300(8) 7.9
333 South Hope Street
Los Angeles, CA 90071
Invista Capital Management, Inc. ............................... Common 2,199,416(8) 5.3
1500 Hub Tower
699 Walnut Street
Des Moines, IA 50309
Jack R. Anderson................................................ Common 829,518(3) 2.0
Preferred 2,771,794(3) 13.2
Richard M. Burdge, Sr. ......................................... Common 287,631(5)(7) *
Preferred 742,104(7) 3.5
Westcott W. Price III........................................... Common 531,297(4)(5)(6) 1.3
Burke F. Gumbiner............................................... Common 184,353(4)(5)(6) *
Warner Heineman................................................. Common 24,900(5) *
Robert W. Jamplis, M.D.......................................... Common 5,000(5) *
Joseph F. Prevratil............................................. Common 39,000(5) *
Van B. Honeycutt................................................ Common 0 *
Robert C. Maxson, Ed.D.......................................... Common 0 *
Jack D. Massimino............................................... Common 132,041(4)(5) *
Gloria L. Austin................................................ Common 29,358(4)(5) *
Michael J. Weinstock............................................ Common 61,306(4)(5) *
Jeffrey H. Margolis............................................. Common 52,526(4)(5) *
Directors and executive officers
as a group (19 persons) ....................................... Common 2,441,965 5.9
Preferred 3,658,306 17.4
</TABLE>
- ------------------------
* Less than 1.0%
(1) c/o FHP International Corporation, P.O. Box 25186, Santa Ana, California
92799-5186 unless otherwise indicated.
116
<PAGE>
(2) Reported in accordance with the beneficial ownership rules of the
Commission. Subject to community property laws, where applicable, voting
power or investment power with respect to shares reflected in the table is
not shared with others.
(3) Includes 137,202 shares of FHP Common Stock held by Mr. Anderson's wife and
271,200 shares of FHP Common Stock held by trusts of which Mr. Anderson's
relatives are beneficiaries. Includes 457,340 shares of FHP Preferred Stock
held by Mr. Anderson's wife and 904,000 shares of FHP Preferred Stock held
by trusts of which Mr. Anderson's relatives are beneficiaries. Mr. Anderson
disclaims beneficial ownership of these shares.
(4) Includes shares held by the trustee under the ESOP. As of December 31, 1995,
the approximate number of shares of FHP Common Stock allocated to the ESOP
accounts of the officers and directors named above were as follows: Westcott
W. Price III -- 5,297 shares; Burke F. Gumbiner -- 3,853 shares; Jack D.
Massimino -- 3,291 shares; Gloria L. Austin -- 2,108 shares; Michael J.
Weinstock -- 2,806 shares; Jeffrey H. Margolis -- 191 shares.
(5) Shares reported include stock options exercisable 60 days after October 31,
1996, which are reported pursuant to Rule 13d-3(d)(1) under the Exchange
Act.
(6) Includes shares held under a revocable trust controlled by the named
individual.
(7) Includes 25,030 shares of FHP Common Stock held by Mr. Burdge's wife and
48,000 shares of FHP Common Stock held by a trust of which Mr. Burdge's
relatives are beneficiaries. Includes 83,435 shares of FHP Preferred Stock
held by Mr. Burdge's wife. Mr. Burdge disclaims beneficial ownership of
these shares.
(8) Based upon a Schedule 13F for the quarter ended June 30, 1996, filed with
the Commission.
(9) Share ownership reported as of September 30, 1996.
117
<PAGE>
PACIFICARE HOLDING
All of the outstanding capital stock of PacifiCare Holding is now owned (and
will be owned through the Effective Time) by PacifiCare.
The following table sets forth certain information regarding the number of
shares of PacifiCare Holding Class A Common and PacifiCare Holding Class B
Common to be held, assuming consummation of the Mergers, by each person expected
to be a beneficial owner of 5% or more of the PacifiCare Holding Class A Common
or the PacifiCare Holding Class B Common or a director of PacifiCare Holding and
by the expected directors and executive officers of PacifiCare Holding as a
group. The table assumes that: (i) the Average Closing Price of PacifiCare
Holding Class B Common is $80.00, so that the Final Exchange Ratio is 0.256;
(ii) the Series A Amendment is approved; (iii) the number of outstanding shares
of FHP Common Stock is 41,214,595 and the number of outstanding shares of FHP
Preferred Stock is 21,035,804; (iv) none of the holders listed above in the
tables acquire or dispose of any PacifiCare Common Stock or FHP Capital Stock
between the dates of the information in such tables and the Effective Time; and
(v) all of PacifiCare's executive officers agree to waive the acceleration of
their existing options.
<TABLE>
<CAPTION>
PACIFICARE HOLDING PACIFICARE HOLDING
CLASS A COMMON CLASS B COMMON
---------------------- ----------------------
NUMBER OF PERCENT OF NUMBER OF PERCENT OF
NAME SHARES CLASS SHARES CLASS
- -------------------------------------------------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
UniHealth......................................... 5,910,000 40.1% 285,000 1.1%
3400 Riverside Drive
Burbank, CA 91505
The Capital Group Companies, Inc. ................ 1,456,666 9.9 3,446,262 12.7
333 South Hope Street
Los Angeles, CA 90071
Massachusetts Financial Services.................. 762,075 5.2 2,203,199 8.1
500 Boylston Street
Boston, MA 02115
FMR Corp. ........................................ -- * 2,401,900 8.9
82 Devonshire Street
Boston, MA 02109
Terry Hartshorn................................... 212,000 1.4 160,683 *
Alan Hoops........................................ 190,000 1.3 193,947 *
Jack Anderson (1)................................. 51,483 * 165,274 *
Craig Beam........................................ -- * -- *
Bradley Call...................................... -- * -- *
David Carpenter................................... 6,900 * 14,900 *
Gary Leary........................................ 6,900 * 14,900 *
Warren Pinckert................................... 10,500 * 10,216 *
Joseph Prevratil.................................. 2,223 * 7,761 *
David Reed........................................ 300 * 6,200 *
Lloyd Ross........................................ 1,500 * 8,900 *
Jean Smith........................................ 230 * 2,425 *
All Executive Officers and Directors as a Group
(26 persons).................................... 542,586 3.6 864,987 3.1
</TABLE>
- ------------------------
* Less than 1.0%
(1) Mr. Anderson also will own 1,385,897 shares of PacifiCare Holding Preferred
upon consummation of the Mergers.
118
<PAGE>
SECOND AMENDED PACIFICARE
DIRECTORS PLAN
The PacifiCare Board of Directors has approved the Second Amended PacifiCare
Directors Plan. The full text of the Second Amended PacifiCare Directors Plan is
attached hereto as Appendix E and is incorporated herein by reference. The
summary of the Second Amended PacifiCare Directors Plan is qualified in its
entirety by reference to the full text of the Second Amended PacifiCare
Directors Plan.
DESCRIPTION OF THE PACIFICARE DIRECTORS STOCK OPTION PLAN
Under the PacifiCare Directors Stock Option Plan, which was approved by
PacifiCare stockholders at the 1996 Annual Meeting of PacifiCare, non-officer
directors of PacifiCare who are not eligible to receive awards under the Second
Amended and Restated 1989 Stock Option Plan for Officers and Key Employees of
PacifiCare Health Systems, Inc., as amended (the "PacifiCare Employee Stock
Option Plan"), are automatically granted NQSOs to purchase 2,000 shares of
PacifiCare Class B Common Stock on December 31 of each year; provided that,
during the 12 preceding months, the director served on the PacifiCare Board of
Directors and was not eligible to receive awards under the PacifiCare Employee
Stock Option Plan. As of the date hereof, six directors are eligible to
participate in the PacifiCare Directors Stock Option Plan. Currently, no more
than 140,000 shares of PacifiCare Class B Common Stock are available for NQSOs
under the PacifiCare Directors Stock Option Plan.
The per share exercise price of the shares of PacifiCare Class B Common
Stock subject to any NQSO granted under the PacifiCare Directors Stock Option
Plan is 100% of the fair market value of the shares on the date of grant. NQSOs
granted under the PacifiCare Directors Stock Option Plan vest in four cumulative
installments of 25% of the shares of PacifiCare Class B Common Stock covered by
each NQSO beginning on the first anniversary of the date of the grant.
NQSOs granted under the PacifiCare Directors Stock Option Plan may not be
exercised after the earlier of: (i) the expiration of 10 years and one day from
the date the NQSO was granted; (ii) the expiration of eight months from the time
the optionee voluntarily or involuntarily ceases to serve as a director of
PacifiCare; and (iii) the expiration of one year from the date an optionee
ceases to serve as a director of PacifiCare by reason of disability or death. In
addition, the PacifiCare Directors Stock Option Plan provides for an automatic
and immediate acceleration of the vesting of all NQSOs granted under the
PacifiCare Directors Stock Option Plan that had been held for at least six
months upon the occurrence of a change of control of PacifiCare (as defined in
the PacifiCare Directors Stock Option Plan) or upon the liquidation or
dissolution of PacifiCare.
During fiscal 1996, Messrs. Carpenter, Leary, Pinckert, Reed and Ross and
Ms. Smith were each granted NQSOs to purchase 2,000 shares of PacifiCare Class B
Common Stock. The aggregate market value of the PacifiCare Class B Common Stock
underlying NQSOs outstanding under the PacifiCare Directors Stock Option Plan is
$2,439,500.
REASON FOR PROPOSAL
The PacifiCare Board of Directors has approved the Second Amended PacifiCare
Directors Plan. Among other changes to the PacifiCare Directors Stock Option
Plan, the Second Amended PacifiCare Directors Plan would provide that: (i) each
eligible director of PacifiCare, upon being elected to the PacifiCare Board of
Directors, will be automatically granted options to purchase 10,000 shares of
PacifiCare Class B Common Stock; (ii) the number of shares available for option
grants under the Second Amended PacifiCare Directors Plan would be increased
from 140,000 to 390,000; and (iii) the number of shares underlying the NQSOs
automatically granted to eligible directors of PacifiCare each December 31 would
increase from 2,000 shares of PacifiCare Class B Common Stock to 5,000 shares of
PacifiCare Class B Common Stock. In order to enhance PacifiCare's ability to
attract and retain the services of experienced and knowledgeable non-officer
directors, the PacifiCare Board of Directors believed it was necessary to
increase the compensation paid to non-officer directors and link such
compensation to the long-term stock performance of PacifiCare. The Second
Amended PacifiCare Directors Plan is being submitted to the holders of
PacifiCare Class A Common Stock for approval at
119
<PAGE>
the PacifiCare Meeting in order to retain its exemption from Section 16(b) of
the Exchange Act. Any NQSOs granted under the Second Amended PacifiCare
Directors Plan, prior to approval of the Second Amended PacifiCare Directors
Plan by the holders of the PacifiCare Class A Common Stock, will be subject to
approval of the Second Amended PacifiCare Directors Plan by the holders of the
PacifiCare Class A Common Stock. If approval is not obtained from the holders of
the PacifiCare Class A Common Stock, any NQSOs granted under the Second Amended
PacifiCare Directors Plan in excess of those permitted by the PacifiCare
Directors Stock Option Plan will be void and the remaining options will be
governed by the terms of the PacifiCare Directors Stock Option Plan.
DESCRIPTION OF THE SECOND AMENDED PACIFICARE DIRECTORS PLAN
The Second Amended PacifiCare Directors Plan amends Section 2 of the
PacifiCare Directors Stock Option Plan to increase the number of shares
available under the PacifiCare Directors Stock Option Plan from 140,000 shares
of PacifiCare Class B Common Stock to 390,000 shares of PacifiCare Class B
Common Stock and amends Section 4 of the PacifiCare Directors Stock Option Plan
to: (i) provide for the automatic grant of NQSOs to purchase 10,000 shares of
PacifiCare Class B Common Stock to each eligible director of PacifiCare, upon
being elected to the PacifiCare Board of Directors; and (ii) increase the number
of shares underlying the NQSOs automatically granted to eligible directors of
PacifiCare each December 31 from 2,000 shares of PacifiCare Class B Common Stock
to 5,000 shares of PacifiCare Class B Common Stock. Except as described in this
paragraph, the Second Amended PacifiCare Directors Plan is substantially the
same as the PacifiCare Directors Stock Option Plan.
FEDERAL INCOME TAX CONSEQUENCES
There will be no federal income tax consequences to either a director of
PacifiCare or PacifiCare on the grant of a NQSO. On the exercise of a NQSO, the
director will have taxable ordinary income equal to the excess of the fair
market value of the shares of PacifiCare Class B Common Stock received on the
exercise date over the option price of the shares. PacifiCare will be entitled
to a tax deduction in an amount equal to such excess, provided PacifiCare
complies with applicable reporting rules. Any ordinary income realized by the
directors upon exercise of a NQSO will increase his tax basis in the PacifiCare
Class B Common Stock thereby acquired. Upon the sale of the PacifiCare Class B
Common Stock acquired by exercise of a NQSO, a director will realize long-term
or short-term capital gain or loss depending upon his holding period for such
stock.
A director who surrenders shares of PacifiCare Common Stock in payment of
the exercise price of a NQSO will not recognize gain or loss on his surrender of
such shares, but will recognize ordinary income on the exercise of the NQSO as
described above. Of the shares received in such an exchange, that number of
shares equal to the number of shares surrendered will have the same tax basis
and capital gains holding period as the shares surrendered. The balance of the
shares received will have a tax basis equal to their fair market value on the
date of exercise and the capital gains holding period will begin on the date of
exercise.
If PacifiCare delivers cash (in lieu of fractional shares) or shares of
PacifiCare Class B Common Stock to a director pursuant to a cashless exercise
program, the director will recognize ordinary income equal to the cash paid and
the fair market value as of the date of exercise of any shares delivered to him.
An amount equal to any such ordinary income will be deductible by PacifiCare,
provided it complies with applicable reporting requirements.
120
<PAGE>
OTHER INFORMATION FOR THE FHP MEETING
ELECTION OF DIRECTORS
The Bylaws of FHP provide that the FHP Board of Directors shall be
classified into three classes as nearly equal in number as possible, such that
approximately one-third of the members of the FHP Board of Directors shall be
elected at each Annual Meeting of Stockholders and each director shall serve for
a three-year term. In November 1995, the FHP Board of Directors was expanded
from eight to nine members and Van B. Honeycutt was appointed as a director with
a term expiring at the 1997 Annual Meeting.
There are three director positions in the class whose term of office expires
at the FHP Meeting. The FHP Board of Directors has designated Jack R. Anderson,
Burke F. Gumbiner and Warner Heineman as nominees for election to three-year
terms expiring in 1999, and until their successors are elected and qualified.
Each nominee has consented to being named in this Joint Proxy Statement/
Prospectus and to serve as a director if elected. All nominees presently serve
on the FHP Board of Directors.
Management proxies will be voted FOR the election of the above named
nominees, unless the holders of FHP Common Stock indicate that their proxies
shall not be voted for them. If for any reason any nominee should decline or be
unable to serve as a director, an event not now anticipated, the named proxies
will vote for such substitute nominee, if any, as may be recommended by the
existing FHP Board of Directors.
Biographical information follows for each person nominated and each person
whose term of office as a director of FHP will continue after the FHP Meeting.
The ages of each member of the FHP Board of Directors are as of November 15,
1996.
NOMINEES FOR ELECTION FOR A THREE-YEAR TERM EXPIRING AT THE 1999 ANNUAL
MEETING
JACK R. ANDERSON, age 71, joined the FHP Board of Directors in June, 1994,
pursuant to the terms of an Agreement and Plan of Merger (the "TakeCare Merger
Agreement") whereby FHP acquired ownership of TakeCare, Inc. and agreed to add
Mr. Anderson to the FHP Board of Directors and to renominate him at the Annual
Meeting of Stockholders in November 1996. He was elected Chairman of the FHP
Board of Directors in June 1995 and is a member of the FHP Executive Committee.
Mr. Anderson is also Chairman of the TMMHC Board of Directors and an FHP
designee for election to the PacifiCare Holding Board of Directors. Mr. Anderson
was Chairman of the Board of Directors of TakeCare from 1988 to June of 1994. He
has been President of Calver Corporation, a health care consulting and investing
firm and a private investor since 1982. Mr. Anderson currently serves on the
Boards of Directors of Horizon Mental Health Management, Inc. and United Dental
Care, Inc.
BURKE F. GUMBINER, age 46, has been a director of FHP since 1984. Mr.
Gumbiner is also a member of the Quality Assessment Committee of the Board. He
was a Vice President of FHP from 1984 to 1989, and in 1989 he became a Senior
Vice President. Mr. Gumbiner joined FHP's largest HMO subsidiary, FHP, Inc. in
1972 and has served in several executive capacities. In August 1995, Mr.
Gumbiner was appointed President of FHP's Insurance Group.
WARNER HEINEMAN, age 74, has been a member of the FHP Board of Directors
since 1990 and is the Chairman of the FHP Audit Committee and a member of the
FHP Compensation and Quality Assessment Committees. He is also a member of the
TMMHC and FHP Financial Corporation Boards of Directors. Mr. Heineman has served
as a Senior Advisor to First Business Bank since 1992. From 1989 to 1992, he
served as Senior Vice President of the Bank of Los Angeles. He also served as a
Senior Vice President of City National Bank from 1981 to 1988. In 1981 he
retired as Vice Chairman and Director of Union Bank after 38 years of service
with that organization. Mr. Heineman is a trustee of Southwestern University
School of Law, a member of the Board of Advisors of UCLA Medical Center, a
member of the Board of Visitors of the UCLA School of Medicine, a member of the
Board of Directors of FHP Foundation and a director of Alexander Haagen
Properties, Inc. and The Countrybaskets Index Funds, Inc.
121
<PAGE>
DIRECTORS CONTINUING IN OFFICE UNTIL THE 1997 ANNUAL MEETING
WESTCOTT W. PRICE III, age 57, has been Vice Chairman of the FHP Board of
Directors since 1986, a member of the FHP Board of Directors since 1984 and is a
member of the FHP Executive Committee. Mr. Price is also a member of the TMMHC
Board of Directors. Mr. Price became President of FHP in 1989 and Chief
Executive Officer in 1990. He also serves as President of two of FHP's HMO
subsidiaries. Mr. Price joined FHP in 1981 as a Senior Vice President. Mr. Price
has been a member of the Board of Directors of FHP Foundation since 1985.
VAN B. HONEYCUTT, age 51, joined the FHP Board of Directors in November
1995, when the FHP Board of Directors was expanded from eight to nine members.
He also serves as a member of the Audit Committee of the Board and as a member
of the TMMHC Board of Directors. Mr. Honeycutt has been President and Chief
Executive Officer of Computer Sciences Corporation since April 1995. Computer
Sciences Corporation is a publicly-traded company listed on the NYSE which
provides information technology consulting, systems integration and outsourcing
services to industry and government. From 1993 to 1995, Mr. Honeycutt served as
President and Chief Operating Officer of Computer Sciences Corporation. From
1987 to 1993, he served as Corporate Vice President and President of Computer
Sciences Corporation's Industry Services Group.
JOSEPH F. PREVRATIL, age 58, has been a member of the FHP Board of Directors
since 1991 and is Chairman of the FHP Executive Committee and a member of the
FHP Audit and Compensation Committees. Mr. Prevratil is also a member of the
TMMHC Board of Directors and an FHP designee for election to the PacifiCare
Holding Board of Directors. Mr. Prevratil also serves as a director and Chief
Executive Officer of FHP Foundation. From 1982 to 1988, Mr. Prevratil served as
President of Wrather Port Properties, Inc., an entertainment and hotel complex
that included the Queen Mary oceanliner in Long Beach, California. In 1988 and
1989 he served as Executive Director of the Port of Long Beach. From 1989 to
1993, Mr. Prevratil was President of his own business, providing contracted
consulting and management services to the leisure-time industry and the
Redevelopment Agency of the City of Long Beach. In 1993, Mr. Prevratil became
President of the RMS Foundation, Inc., a nonprofit corporation operating the
Queen Mary oceanliner attraction.
DIRECTORS CONTINUING IN OFFICE UNTIL THE 1998 ANNUAL MEETING
RICHARD M. BURDGE, SR., age 69, joined the FHP Board of Directors in July
1994 pursuant to the terms of the TakeCare Merger Agreement whereby FHP agreed
to add Mr. Burdge to the FHP Board of Directors and to renominate him at the
Annual Meeting of Stockholders in November, 1995. Mr. Burdge currently serves as
Chairman of the FHP Compensation Committee and as a member of the FHP Audit
Committee. Mr. Burdge is also a member of the TMMHC Board of Directors. Mr.
Burdge retired in 1984 as Executive Vice President of CIGNA Corporation, a
position he held from 1982 to 1984. He served as Senior Executive Vice President
of INA Corporation from 1980 to 1982 and as Executive Vice President of INA
Corporation from 1975 to 1980. He also served as President and Chief Operating
Officer of the American Stock Exchange from 1972 to 1975.
ROBERT C. MAXSON, ED.D., age 60, joined the FHP Board of Directors in August
1995, when he filled a vacancy caused by the resignation of another director. He
currently serves on the FHP Compensation Committee. Dr. Maxson also serves on
the Board of Directors of TMMHC and on the Board of Directors of the FHP
Foundation, a position he is obligated to resign if he becomes a stockholder of
FHP. Dr. Maxson has been President of California State University, Long Beach
since 1994. Dr. Maxson served as the President of the University of Nevada, Las
Vegas, from 1984 to 1994. He has also served on other corporate boards such as
Bank of America Nevada and Houston Security Bank.
ROBERT W. JAMPLIS, M.D., age 76, joined the FHP Board of Directors in August
1995, when he filled a vacancy caused by the resignation of another director. He
serves as Chairman of the Quality Assessment Committee. Dr. Jamplis is also a
member of the TMMHC Board of Directors. He served on the Boards of Directors of
TakeCare and two of its HMO subsidiaries prior to FHP's acquisition of TakeCare
in 1994. Dr. Jamplis has been President and Chief Executive Officer of Palo Alto
Medical
122
<PAGE>
Foundation since 1981, was named Executive Director of the Palo Alto Clinic in
1966, and joined the Clinic in 1954. Dr. Jamplis has written extensively and
held leadership positions with numerous medical, academic and business
organizations. He presently serves on the Boards of Directors of Children's
Hospital at Stanford, Santa Barbara Medical Foundation Clinic and the American
Cancer Society-California Division.
COMMITTEES OF THE FHP BOARD OF DIRECTORS AND BOARD ATTENDANCE
COMMITTEES OF THE FHP BOARD OF DIRECTORS. To assist in the discharge of its
responsibilities, the FHP Board of Directors has established four committees,
the Executive, Audit, Compensation and Quality Assessment Committees. The
members of these standing committees are elected by the FHP Board of Directors
and serve at its pleasure. The committees of the FHP Board of Directors were
reconstituted in June 1995. At that time, the FHP Board of Directors combined
the functions of the Nominating Committee into the Executive Committee.
The FHP Executive Committee is comprised of Joseph F. Prevratil (Chairman),
Jack R. Anderson and Westcott W. Price III. During the year ended June 30, 1996,
the FHP Executive Committee met six times. In performing its nominating
function, the FHP Executive Committee identifies and recommends director
candidates to serve on the FHP Board of Directors and its committees;
establishes and periodically reviews criteria for membership on the FHP Board of
Directors; develops policies on the optimum size and compensation of the FHP
Board of Directors and its committees; and establishes procedures for the
director nomination process. The FHP Executive Committee does not plan to
consider nominees recommended by stockholders.
The FHP Audit Committee is comprised of Warner Heineman (Chairman), Richard
M. Burdge, Sr., Van B. Honeycutt and Joseph F. Prevratil. Messrs. Heineman,
Burdge and Prevratil served on the FHP Audit Committee for the entire year ended
June 30, 1996. Mr. Honeycutt was appointed as an additional member of the FHP
Audit Committee in January 1996. The FHP Audit Committee met four times during
the fiscal year ended June 30, 1996. The FHP Audit Committee recommends to the
FHP Board of Directors the retention or discharge of FHP's independent auditors;
reviews the engagement of the independent auditors including the scope, extent
and procedures of the audit and the fees to be paid therefor; reviews, in
consultation with the independent auditors, the audit results and their opinion
letter or proposed report of audit and related management letter, if any;
reviews the independence of the independent auditors and, in this connection,
reviews and approves the engagement of the independent auditors for services of
a non-audit nature; reviews and approves the audited financial statements;
consults with the independent auditors, FHP's internal auditors and FHP's
management (together or separately) on the adequacy of internal accounting
controls and reviews the results thereof; directs and supervises investigations
into matters within the scope of the FHP Audit Committee's duties; and performs
such other functions as may be necessary in the efficient discharge of its
duties.
The FHP Compensation Committee is comprised of Richard M. Burdge, Sr.
(Chairman), Warner Heineman, Robert C. Maxson and Joseph F. Prevratil. Messrs.
Burdge, Heineman and Prevratil served on the FHP Compensation Committee for the
entire year ended June 30, 1996. Mr. Maxson was appointed as an additional
member of the FHP Compensation Committee in September 1995. The FHP Compensation
Committee held seven meetings during the year ended June 30, 1996. See
"Compensation Committee Report on Executive Compensation" below. The FHP
Compensation Committee administers the granting of stock options to employees
under FHP's Executive Incentive Plan; reviews and approves all compensation,
including incentive compensation for the Chief Executive Officer and most highly
paid executives of FHP; reviews and submits to the full FHP Board of Directors
recommendations concerning new executive compensation and stock plans; and
establishes and periodically reviews FHP's policies regarding benefits.
ATTENDANCE AT MEETINGS. The FHP Board of Directors held six meetings during
the year ended June 30, 1996. Each director attended 75% or more of the meetings
of the FHP Board of Directors and committees of the FHP Board of Directors on
which the director served at any time during the year.
123
<PAGE>
NONEMPLOYEE DIRECTOR COMPENSATION
DIRECTORS' FEES. In June 1995, the FHP Board of Directors restructured the
fees paid to its non-employee directors so as to reduce the initial amount paid
to new non-employee directors, to encourage long-term participation by
non-employee directors and to encourage consistent participation by committee
members. As of June 15, 1996, the initial fee paid to non-employee directors
first elected to the FHP Board of Directors after June 15, 1996 was reduced to
$5,000 per quarter (from $10,000 per quarter) and such fee will be increased at
the end of each year of service as a non-employee director by the sum of $1,250
per quarter up to a maximum per quarter compensation rate of $10,000. The
restructured fee schedule was made applicable to Jack R. Anderson and Richard M.
Burdge based upon the date of commencement of their service as non-employee
directors in 1994. In addition, each non-employee director who serves as a
member of a committee of the Board (other than the Chairmen of the Executive,
Audit, Compensation and Quality Assessment Committees) is to receive a fee of
$1,000 each for each committee meeting attended. The Chairman of the Executive
Committee is paid an annual sum of $50,000 for service in such capacity, the
Chairman of the Audit Committee is paid an annual sum of $25,000 for service in
such capacity, the Chairman of the Compensation Committee is paid an annual sum
of $10,000 for service in such capacity, and the Chairman of the Quality
Assessment Committee is paid an annual sum of $10,000 for service in such
capacity. Warner Heineman also received $10,000 for serving on the Board of
Directors of one of FHP's subsidiaries. Employee directors receive no fees for
service as member of the FHP Board of Directors or its committees.
DEFERRED COMPENSATION. FHP adopted a Deferred Compensation Plan for
Nonemployee Directors which was terminated as of December 31, 1995. From July 1
through December 31, 1995, an amount equal to 8% of the non-employee directors'
annual director fees was credited to their benefit on FHP's books. Such funds
were credited at the same interest rate that FHP earns on its cash and cash
equivalent investments. Effective January 1, 1996, the non-employee Directors'
account balances were transferred into FHP's Deferred Compensation Plan. The
non-employee Directors may voluntarily elect to defer all or a portion of their
fees into FHP's Deferred Compensation Plan.
Set forth below are the fees received during the fiscal year ended June 30,
1996 by the non-employee directors of FHP for service as directors of FHP and
certain of its subsidiaries and the deferral amounts (including earnings) which
were accrued on FHP's books for non-employee directors during the six months
ended December 31, 1995:
<TABLE>
<CAPTION>
FEES DEFERRAL AMOUNTS
--------- -----------------
<S> <C> <C>
Jack R. Anderson..................................... $ 25,000 $ 1,170
Richard M. Burdge, Sr................................ 38,000 1,696
Warner Heineman...................................... 83,000 3,642
Van B. Honeycutt..................................... 12,000 0
Robert W. Jamplis.................................... 22,500 680
Robert C. Maxson..................................... 18,000 400
Joseph F. Prevratil.................................. 95,000 4,584
</TABLE>
STOCK OPTIONS. FHP's Executive Incentive Plan provides for the automatic
award of NQSOs to non-employee directors according to the formula set forth
below. Each person who first becomes a non-employee director of FHP is awarded a
NQSO to purchase 10,000 shares of FHP Common Stock at an option exercise price
equal to the market value of FHP Common Stock on the date that person becomes a
director. This NQSO becomes exercisable in full only after the optionee has
completed two years of continuous service as a non-employee director. Based on
the foregoing formula, NQSOs were granted each to Robert W. Jamplis and Robert
C. Maxson on August 7, 1995 to purchase 10,000 shares of FHP Common Stock at an
exercise price of $23.8125 per share. Similarly, based on the foregoing formula,
NQSOs were granted to Van B. Honeycutt on November 16, 1995, to purchase 10,000
shares of FHP Common Stock at an exercise price of $25.00 per share.
The FHP Executive Incentive Plan further provides that a person who has
continuously served as a non-employee director of FHP for two years and has not
received an option award during that
124
<PAGE>
period, is awarded NQSOs to purchase 10,000 additional shares of FHP Common
Stock. This option becomes exercisable at the rate of 20% of the shares covered
thereby for each year thereafter that the optionee completes as a non-employee
director. Based on the foregoing formula, NQSOs were granted to Jack R. Anderson
on June 17, 1996, to purchase 10,000 shares of FHP Common Stock at an exercise
price of $27.40625 per share.
The FHP Executive Incentive Plan also provides that a person who
continuously serves as a non-employee director of FHP for a period of two years
after receiving the award described in the preceding paragraph, receives NQSOs
to purchase 2,000 additional shares of FHP Common Stock annually for each year
that the director continues to serve in that capacity. Each of these NQSOs
becomes exercisable at the rate of 20% of the shares covered thereby for each
year thereafter that the optionee completes as a non-employee director. Based on
the foregoing formula, NQSOs were granted to Warner Heineman on October 2, 1995,
to purchase 2,000 shares of FHP Common Stock at an exercise price of $24.25 per
share.
In addition, the FHP Executive Incentive Plan provides that each
non-employee director who serves as Chairman of the FHP Executive Committee will
be awarded NQSOs to purchase 50,000 shares, each non-employee director who
serves as Chairman of the FHP Audit Committee will be awarded NQSOs to purchase
25,000 shares, and each non-employee director who serves as Chairman of the FHP
Compensation Committee and each non-employee director who serves as Chairman of
the FHP Quality Assessment Committee will receive NQSOs to purchase 10,000
shares.
In each case, the award is granted on the date the director is first elected
to a committee chairmanship. The exercise price of such NQSOs is equal to the
market value per share on the date of award. The NQSOs are exercisable 25% as of
the date of grant and 25% on the first three anniversaries thereof on which such
Chairman has continuously served as a non-employee director of FHP. Based on the
foregoing formula, NQSOs were granted to Robert Jamplis upon his election as
Chairman of the FHP Quality Assessment Committee on September 7, 1995, to
purchase 10,000 shares of FHP Common Stock at an option exercise price of $23.00
per share.
CONSULTING FEES. No consulting fees were paid to any director during the
year ended June 30, 1996.
125
<PAGE>
EXECUTIVE COMPENSATION
The following table provides information concerning the annual and long-term
compensation for services in all capacities to FHP and its subsidiaries for the
fiscal years shown of those persons ("Named Executive Officers") who were,
during the latest fiscal year (i) the chief executive officer and (ii) the other
four most highly compensated executive officers of FHP.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------------------
ANNUAL COMPENSATION OPTION
------------------------------- RESTRICTED AWARDS ALL OTHER
FISCAL SALARY(1) BONUS(2) OTHER(3) STOCK (NUMBER OF COMPENSATION(4)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) AWARDS SHARES) ($)
- ---------------------------------------- ------ --------- -------- -------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
WESTCOTT W. PRICE III 1996 499,990 355,020 -- --(5) 25,000 15,093
Vice Chairman of the Board; President 1995 499,990 -0- -- -0- 275,000 9,582
and CEO 1994 428,922 95,514 -- -0- 50,000 28,301
JACK D. MASSIMINO 1996 361,924 591,700 -- --(5) 25,000 13,683
President and Chief Executive Officer, 1995 450,008 -0- -- -0- 25,000 10,492
Talbert Medical Management Corporation 1994 345,483 151,226 -0- 225,000 29,277
GLORIA L. AUSTIN 1996 209,996 645,280(6) -- --(5) 10,000 12,331
Senior Vice President, California, 1995 184,966 20,000 -- -0- 10,000 9,143
Talbert Medical Management Corporation 1994 151,548 35,266 -- -0- 10,000 23,239
MICHAEL J. WEINSTOCK 1996 249,995 207,020 -- --(5) 10,000 14,282
Senior Vice President, General Counsel 1995 249,995 -0- -- -0- 10,000 10,030
and Secretary 1994 227,288 103,897 -- -0- 60,000 28,301
JEFFREY H. MARGOLIS 1996 244,627 146,874 -- -0- -0- 12,176
Senior Vice President and Chief 1995 227,307 -0- -- -0- -0- 6,878(9)
Information Officer 1994 4,821(7) --(8) -- -0- 25,000 --
</TABLE>
- ------------------------------
(1) Includes the base salary earned by the Named Executive Officer during the
fiscal year covered and any voluntary salary reduction resulting from
contributions for the fiscal year by the Named Executive Officer to (a)
FHP's ESOP, and (b) FHP's Deferred Compensation Plan.
(2) Includes the cash value of bonus earned by the Named Executive Officer
during the fiscal year covered and the cash value of voluntary bonus
reductions resulting in contributions to (a) FHP's ESOP and (b) FHP's
Deferred Compensation Plan.
(3) Excludes perquisites and other personal benefits if the value did not exceed
the lesser of $50,000 or 10% of both salary and bonus.
(4) Includes the dollar value of taxable income from group term life insurance
coverage in excess of $50,000 purchased by FHP as follows: Westcott W. Price
III--$1,632; Jack D. Massimino--$1,650; Gloria L. Austin--$331, Michael J.
Weinstock--$2,244; and Jeffrey H. Margolis--$176. Amount also includes
interest credited on deferred compensation in excess of 120% of the
applicable federal long-term rate as follows: Westcott W. Price III--$1,461;
Jack D. Massimino--$33; and Michael J. Weinstock--$38. Also includes FHP
contributions under the FHP Money Purchase Pension Plan as follows: Westcott
W. Price III--$9,000; Jack D. Massimino--$9,000; Gloria L. Austin--$9,000;
Michael J. Weinstock--$9,000; and Jeffrey H. Margolis--$9,000. Also includes
FHP contributions under FHP's ESOP as follows: Westcott W. Price
III--$3,000; Jack D. Massimino--$3,000; Gloria L. Austin--$3,000; Michael J.
Weinstock--$3,000; and Jeffrey H. Margolis--$3,000. The foregoing retirement
plan contributions are through December 31, 1995. Contributions are made
annually on December 31st; therefore, no contributions were made for the
six-month period ended June 30, 1996. Jeffrey H. Margolis became a
participant in the retirement plans on January 1, 1995.
(5) Pursuant to a Stock Purchase Agreement dated as of March 15, 1996, as
amended (the "Stock Purchase Agreement"), by and between FHP, TMMC, THSC and
certain management investors, Westcott W. Price III, Jack D. Massimino,
Gloria L. Austin and Michael J. Weinstock purchased 67,500, 500,000, 50,000
and 10,000 shares, respectively, of TMMC Common Stock for $0.01 per share,
the same per share price at which FHP purchased its 9,100,000 shares of TMMC
Common
126
<PAGE>
Stock. In addition, pursuant to the Stock Purchase Agreement, Westcott W.
Price III, Jack D. Massimino, Gloria L. Austin and Michael J. Weinstock
purchased four, 27, three and one shares, respectively, of THSC Common Stock
for $2.00 per share, the same per share price at which FHP purchased its 500
shares of THSC Common Stock. On July 1, 1996, 1997, 1998 and 1999, 25% of
the stock issued to each Named Executive Officer vests. The shares of TMMC
and THSC Common Stock are also subject to numerous other restrictions which
lapse on specified dates. FHP, however, has a performance purchase option to
purchase 80% of the shares of stock that vests on July 1, 1996, 1997 and
1998 for the original purchase prices of $0.01 and $2.00, respectively, if
it is determined by FHP's Audit Committee that TMMC did not meet its planned
financial goals for the previous fiscal year. FHP's Audit Committee has
determined that TMMC met its planned financial goals for the fiscal year
ended June 30, 1996.
The Stock Purchase Agreement provides that FHP has an option to repurchase
from the Named Executive Officers for the original purchase prices of $0.01
and $2.00, respectively, any portion of their TMMC and THSC Common Stock
which remains unvested when and if these Named Executive Officers cease to
be an employee of FHP, an affiliate of FHP or TMMC. FHP also has an
unrestricted option to purchase from the Named Executive Officers at any
time prior to October 1, 1999 any portion of their TMMC and THSC Common
Stock (whether or not vested or otherwise restricted) for $30 per share. FHP
proposes to amend the Stock Purchase Agreement to provide that upon the
termination of the employment of Westcott W. Price III or Michael J.
Weinstock with FHP, all of such Named Executive Officer's Common Stock will
vest; however, such common stock would remain subject to both FHP's
performance purchase option and FHP's $30-per-share purchase option. The
amendment also would provide that upon a change in control (as defined) of
Talbert which occurs after the consummation of the transactions contemplated
by the Merger Agreement, the options of FHP to purchase the TMMC and THSC
Common Stock at $.01 and $2.00, respectively, per share will expire. The
restricted shares of stock are held in escrow by the Assistant Secretary of
FHP in the capacity of escrow agent under the Stock Purchase Agreement. The
Named Executive Officers have all rights of a shareholder with respect to
the stock including the right to vote, to receive dividends and to
participate in stock splits or other recapitalizations, and to exchange such
shares in a merger, consolidation or other reorganization. The number of
shares and repurchase prices are subject to adjustment for a 1-for-3.33
reverse stock split declared by the TMMC Board of Directors on September 17,
1996.
(6) Includes total bonus amount awarded and accrued during fiscal year 1996 but
subject to payment in the two following fiscal years.
(7) Following the acquisition of TakeCare, Inc., Mr. Margolis became an employee
of FHP and served as such during the last 13 days during the fiscal year
ended June 30, 1994. On an annualized basis, his salary would have been
approximately $139,400.
(8) Mr. Margolis received a bonus of $90,278 under the TakeCare Incentive
Program for the period of January 1, 1994 through June 17, 1994.
(9) Includes $6,833 paid to Mr. Margolis in lieu of certain welfare benefits
which he was otherwise entitled to as an employee of TakeCare.
OPTION GRANTS IN LAST FISCAL YEAR. The following table provides details
regarding stock options granted under the FHP Executive Incentive Plan to the
Named Executive Officers during the fiscal year ended June 30, 1996. In
addition, in accordance with Commission's rules, there are shown the
hypothetical gains or "option spreads" that would exist for the respective
options if they were exercised. These gains are based on assumed rates of
compound stock price appreciation of 5% and 10% from the date the options were
granted over the full option term. In assessing these values it
127
<PAGE>
should be kept in mind that no matter what theoretical value is placed on a
stock option, its ultimate value will depend on the market value of the FHP
Common Stock at a future date. The FHP Executive Incentive Plan does not provide
for the grant of stock appreciation rights.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR
% OF TOTAL OPTIONS OPTION TERM (2)
NUMBER OF SHARES GRANTED EXERCISE ----------------------
UNDERLYING OPTIONS TO EMPLOYEES PRICE PER EXPIRATION 5% 10%
NAME GRANTED (1) IN FISCAL YEAR SHARE (1) DATE ($37.6682) ($59.9803)
- --------------------------- ------------------- --------------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Westcott W. Price III...... 25,000(3) 6.3% $ 23.125 07/03/05 $ 363,580 $ 921,383
Jack D. Massimino.......... 25,000(3) 6.3% 23.125 07/03/05 363,580 921,383
Gloria L. Austin........... 10,000(3) 2.5% 23.125 07/03/05 145,432 368,553
Michael J. Weinstock....... 10,000(3) 2.5% 23.125 07/03/05 145,432 368,553
Jeffrey H. Margolis........ -- n/a n/a n/a n/a n/a
</TABLE>
- ------------------------
(1) All options were granted at an exercise price equal to the fair market value
of FHP's Common Stock on the option grant date. In accordance with the terms
of FHP's Executive Incentive Plan, options become fully exercisable on the
occurrence of a change of control unless such acceleration is nullified by
FHP's Board of Directors within 10 business days after the Board of
Directors becomes aware of a change in control. In connection with the
acquisition of FHP by PacifiCare, the Board of Directors made the
determination to nullify the provisions in the Executive Incentive Plan
providing for automatic acceleration and has reinstated the existing vesting
and forfeiture provisions subject to the terms and conditions of the
Reorganization Agreement.
(2) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises and FHP Common Stock holdings are
dependent on the future performance of the FHP Common Stock and overall
stock market conditions. There can be no assurance that the amounts
reflected in this table will be achieved.
(3) Exercisable July 3, 2002, but subject to accelerated incremental vesting as
to 10%, 15%, 20%, 25% and 30% of the total number of option shares granted,
respectively, each year subsequent to the date of the grant (i) if the
consolidated EPS of FHP for the fiscal year ending on the June 30
immediately preceding such accelerated vesting date exceed both EPS for the
preceding fiscal year, and the average EPS for the two preceding fiscal
years and (ii) if the optionee shall have been in the continuous employ of
FHP or any subsidiary from the date of grant of this option through such
accelerated vesting date. If accelerated vesting does not occur the
percentage will be carried forward and added to the percentage which becomes
eligible for accelerated vesting with respect to the next anniversary date.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table provides information concerning the exercise of options
during the last fiscal year and unexercised options held as of the end of the
last fiscal year by the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTION SHARES AT FY-END IN-THE-MONEY OPTION
ACQUIRED ON VALUE (#) SHARES AT FY-END ($)
EXERCISE REALIZED -------------------------- --------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Westcott W. Price III........... -- -- 30,000 420,000 255,625 1,894,375
Jack D. Massimino............... -- -- 76,250 270,000 208,359 1,236,563
Gloria L. Austin................ 5,250 30,844 9,000 47,750 65,547 272,703
Michael J. Weinstock............ 10,000 137,500 19,000 96,000 39,375 480,000
Jeffrey H. Margolis............. 24,813 724,506 7,500 52,125 40,781 1,005,145
</TABLE>
128
<PAGE>
CHANGE IN CONTROL EMPLOYMENT AGREEMENTS
FHP has entered into employment agreements with certain key executive
officers, including the Named Executive Officers, providing for benefits in the
event of a "Change of Control" of FHP. See "The Merger and Related Transactions
- -- Interest of Certain Persons in the Mergers."
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Section 16(a) of
the Exchange Act and the rules thereunder require FHP's officers and directors
and persons who own more than 10% of FHP Common Stock to file reports of
ownership and changes in ownership with the Commission and to furnish FHP with
copies.
Based upon its review of the copies of such forms received by it, or written
representation from certain reporting persons, FHP believes that, during the
last fiscal year, all filing requirements applicable to its officers, directors,
and greater than 10% beneficial owners were complied with on a timely basis.
CERTAIN TRANSACTIONS. Robert W. Jamplis, a member of the FHP Board of
Directors, serves as President and Chief Executive Officer of the Palo Alto
Medical Foundation. During the fiscal year ended June 30, 1996, FHP's HMO
subsidiaries made capitation payments totaling approximately $14.8 million to
the Palo Alto Medical Foundation for the provision of health care services to
approximately 20,000 of FHP's HMO members.
In 1995, Robert Franklin, a Senior Vice President of FHP, borrowed $100,000
from FHP for the purpose of purchasing a new residence. The loan, which bears
interest at the rate of 7.96% per annum, is payable in five annual installments
of $20,000 each commencing on December 1, 1995. At June 30, 1996, the principal
outstanding balance on this loan was $80,000. In the interim, the loan is
secured by a recorded second lien on Mr. Franklin's residence.
In 1994, Kenneth S. Ord, Senior Vice President and Chief Financial Officer
of FHP, borrowed $100,000 for the purpose of purchasing a residence in
California following his relocation from Michigan. The loan, which bears
interest at a rate of 8.5% per annum, may be forgiven in installments of $20,000
a year if Mr. Ord remains employed with FHP through February 14, 1999. In the
interim, the loan is secured by a recorded second lien on Mr. Ord's residence.
At June 30, 1996, the loan had been forgiven, in part, by $40,000 plus accrued
interest, and the outstanding principal balance was $60,000.
In 1994, Jeffrey H. Margolis, Senior Vice President and Chief Information
Officer of FHP, borrowed $150,000 from FHP for the purpose of purchasing a
residence in California following his relocation from Colorado. $100,000 of the
principal amount of the loan, which bears interest at a rate of 8.5% per annum,
may be forgiven in installments of $20,000 per year if Mr. Margolis remains
employed with FHP through August 1, 1999. The remaining $50,000 of principal,
together with interest thereon, is due and payable on August 1, 1997. At June
30, 1996, the loan had been forgiven, in part, by $20,000 plus accrued interest,
and the outstanding principal balance was $130,000. In the interim, the loan is
secured by a recorded second lien on Mr. Margolis' residence.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION FOR THE FISCAL YEAR
ENDED JUNE 30, 1996
INTRODUCTION. The FHP Compensation Committee consists of Richard M. Burdge,
Sr. (Chairman), Warner Heineman, Robert C. Maxson and Joseph F. Prevratil. Mr.
Maxson was appointed a member of the FHP Compensation Committee on September 7,
1995. All members of the FHP Compensation Committee are non-employee directors
who are not eligible to participate in any of the executive compensation
programs. The FHP Compensation Committee has responsibility for administration
of FHP's executive compensation programs, including the Management Compensation
Program (the "Salary Program"), under which salaries of senior management
personnel are determined; the Management Incentive Plan (the "Bonus Program"),
which provides for cash bonuses to salaried employees; and the Executive
Incentive Plan, which authorizes grants of stock options, restricted stock and
performance units.
129
<PAGE>
COMPENSATION PHILOSOPHY. FHP's executive compensation policies are designed
to (i) provide competitive levels of overall compensation in order to attract
and retain qualified executives in the industry; (ii) motivate executive
officers to achieve FHP's business objectives; and (iii) reward executive
officers for their achievements on behalf of FHP. To achieve these goals, the
FHP Compensation Committee and the FHP Board of Directors have followed an
executive compensation program primarily consisting of three integrated
components -- base salaries, executive incentives and stock options.
BASE SALARIES. It is the policy of the FHP Compensation Committee to
establish and maintain executive salary levels that reflect position
responsibilities, are competitive with salary structures for health care
executive groups having similar operating responsibilities and are capable of
attracting, retaining and motivating executives. Historically, increases in base
salaries have been dependent on the executives' and FHP's performance for the
previous year.
The base salaries of the Named Executive Officers did not increase in any
material respect for fiscal year 1996 from fiscal year 1995 because FHP's
financial performance for fiscal year 1995 was judged less than satisfactory by
the FHP Compensation Committee. In connection with the Restructuring Plan of FHP
into three distinct business segments, FHP instituted changes in the operational
and functional responsibilities of certain of the Named Executive Officers
including Mr. Massimino. Effective July 1, 1995, the FHP Compensation Committee
established or maintained base salaries for the Named Executive Officers as
follows: Mr. Price, $500,000; Mr. Massimino, $350,000; Ms. Austin, $210,000; Mr.
Weinstock, $250,000; and Mr. Margolis, $240,000. No changes were made to the
foregoing base salaries of the Named Executive Officers during the course of
fiscal year 1996.
ANNUAL INCENTIVES. FHP has for many years utilized its Bonus Program to
provide annual incentives to executive personnel of FHP and its subsidiaries.
For fiscal year 1996, the Bonus Program provided for potential cash bonuses to
eligible participants based upon established financial and operational goals.
Under the Bonus Program, the FHP Compensation Committee established
financial and operational goals for each division of FHP (HMO, TMMC and
Insurance) and for each major corporate function (finance; human resources;
information systems; legal; etc.) within FHP. For fiscal year 1996, the
Divisional financial goals included items such as pre-tax income and membership
growth. The operational goals included items such as quality and service
improvements. The functional goals included pre-tax income, quality and service
improvements and attainment of functional budgets. Each participant's final
bonus is determined by weighing his or her performance against the pre-
established financial and operational objectives.
In fiscal year 1996, certain divisions and corporate functions achieved
their financial and operational objectives. Accordingly, bonuses were paid
totaling approximately $6.3 million, of which the Named Executive Officers
received an aggregate of approximately $1.9 million. Mr. Price received a bonus
of $355,020 under the Bonus Program for 1996 based on his supervision of, and
the performance of, the three divisions. The bonuses of the other Named
Executive Officers ranged from approximately 37.5% to 75.4% of their total cash
compensation. The FHP Compensation Committee believes that the cash compensation
of the Named Executive Officers should be subject to significant annual
variation depending on whether or not the performance targets under the Bonus
Program have been achieved.
LONG-TERM INCENTIVE PROGRAM. In 1992, the FHP Compensation Committee
approved a program providing for a series of grants of NQSOs spaced over four
successive years (beginning July 1, 1992 and ending July 1, 1995) in which the
vesting schedule of each option is tied directly to growth in EPS. The optionees
are presented under each option with five annual opportunities for accelerated
vesting, which will be realized in a particular year only if EPS exceeds both
EPS of the previous year and average EPS for the two previous years. Because of
the four-year schedule for the granting of
130
<PAGE>
options, this challenge is presented to the optionees each year for eight
continuous years from 1993 to the year 2000. This provides incentives for
continued service with FHP while establishing a new option price for each grant
that should reflect FHP's recent performance.
EPS increased in 1993 and 1994, resulting in the partial acceleration of
vesting of options previously granted under the four-year program described
above. During 1995 FHP's EPS did not increase and no additional acceleration of
vesting of such options occurred during fiscal year 1995. During fiscal year
1996, the FHP Compensation Committee determined that EPS goals for fiscal year
1996 were met, resulting in the partial acceleration of vesting of options
previously granted under the four-year program.
Other than option grants under the four-year program described above, no
additional options have been awarded to any of the Named Executive Officers
during fiscal year 1996.
PERFORMANCE OF THE CHIEF EXECUTIVE OFFICER. In setting the base salary of
the Chief Executive Officer, the FHP Compensation Committee has taken note of
the Chief Executive Officer's progress toward the Board's objectives of
increasing the HMO membership base and revenue, broadening the range of services
offered to individuals and employer groups, and achieving better control over
costs while maintaining the quality of health care services. Consistent with the
results for fiscal year 1995, Mr. Price's salary throughout the fiscal year
continued at the level set during fiscal year 1994 in connection with the
TakeCare merger. In addition, other than option awards previously approved under
the four-year program described above, Mr. Price did not receive any new option
awards during fiscal year 1996.
Respectfully submitted,
Richard M. Burdge, Sr.
Warner Heineman
Robert C. Maxson
Joseph F. Prevratil
FHP COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The FHP Compensation Committee members serving during the entire year were
Richard M. Burdge, Sr. (Chairman), Warner Heineman and Joseph F. Prevratil.
Robert C. Maxson was appointed as an additional member of the Compensation
Committee in September 1995. Each of the members of the Compensation Committee
are non-employee directors of FHP.
Mr. Prevratil is the President of the RMS Foundation, Inc. (the
"Foundation") which manages the day-to-day operations of the Queen Mary
oceanliner tourist attraction located in Long Beach harbor in California. During
the fiscal year ended June 30, 1994, and a portion of fiscal year ended June 30,
1995, FHP's HMO and insurance subsidiaries provided health care coverage to the
Foundation's employees. During the fiscal year ended June 30, 1996 the
Foundation's largest outstanding account balance was $105,109. As of October 6,
1995, the Foundation had paid the account balance, including interest at the
rate of 8.5% per annum, in full. Since 1990, Mr. Prevratil has been President of
J&P Riverside Hotel Corp., the general partner in Riverside Hotel Partners,
Ltd., which owned and operated the Sheraton Riverside Hotel. In February, 1996,
Riverside Hotel Partners, Ltd., a limited partnership, filed a petition under
Chapter 11 of the Federal bankruptcy laws.
No executive officer of FHP during the last fiscal year served as a member
of a compensation committee or director of another for-profit entity in a
situation in which an executive officer of such other entity served as a member
of the FHP Compensation Committee.
131
<PAGE>
PERFORMANCE GRAPH OF FHP
The following graph demonstrates the performance of the cumulative total
return to the stockholders of FHP Common Stock during the previous five fiscal
years in comparison to the cumulative total return of the Standard & Poor's
(S&P) Health Care Composite Index and the S&P 500 Stock Index.
PERFORMANCE VS. S&P INDICES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
FHP S&P HEALTH S&P 500
<S> <C> <C> <C>
1991 100.0 100.0 100.0
1992 76.1 112.9 113.3
1993 118.5 103.0 128.7
1994 104.4 105.9 130.6
1995 100.0 152.2 164.5
1996 119.0 212.3 207.2
</TABLE>
INDEXED RETURNS (1991=100)
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
FHP............................ $ 100.0 $ 76.1 $ 118.5 $ 104.3 $ 100.0 $ 119.0
S&P Health..................... 100.0 112.9 103.0 105.9 152.2 212.3
S&P 500........................ 100.0 113.3 128.7 130.6 164.5 207.2
</TABLE>
Assumes $100 invested on June 30, 1991 in FHP Common Stock, S&P Health Care
Composite Index, and S&P 500 Index.
APPOINTMENT OF INDEPENDENT AUDITORS
The FHP Board of Directors has reappointed the firm of Deloitte & Touche LLP
to serve as independent auditors for FHP for the fiscal year ending June 30,
1997, such appointment to continue at the pleasure of the FHP Board of Directors
and be subject to the approval of FHP's stockholders. Deloitte & Touche LLP
(including the predecessor firm Deloitte Haskins & Sells) has served as
independent auditors for FHP since 1986. If the FHP Merger is consummated,
Deloitte & Touche LLP will no longer serve as independent auditors for FHP as
FHP will become a subsidiary of PacifiCare Holding.
A proposal to ratify this appointment will be presented to the stockholders
at the FHP Meeting. A representative of Deloitte & Touche LLP is expected to be
present at the FHP Meeting and available to respond to appropriate questions
and, although that firm has indicated that no statement will be made, an
opportunity for a statement will be provided.
THE FHP BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION AND APPROVAL
OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP.
132
<PAGE>
ADDITIONAL INFORMATION
FHP does not intend to present any other business for action at the FHP
Meeting and does not know of any other business intended to be presented by
others.
FHP's Bylaws require that, for nominations of persons for election to the
FHP Board of Directors or for other business to be properly brought before an
annual meeting by a stockholder, the Secretary of FHP must have received written
notice thereof not later than the 60th day nor earlier than the 90th day prior
to the first anniversary of the preceding year's annual meeting. The notice must
set forth (i) as to each person whom the stockholder proposes to nominate for
election as a director all information relating to such person that is required
to be disclosed in solicitations of proxies for election of directors in an
election contest, or is otherwise required, in each case pursuant to Regulation
14A under the Exchange Act, as amended and Rule 14a-11 thereunder (including
such person's written consent to being named in the proxy statement as a nominee
and to serving as a director if elected); (ii) as to any other business that the
stockholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (iii) as to the stockholder giving the notice and the beneficial
owner, if any, on whose behalf the nomination or proposal is made (a) the name
and address of such stockholder, as they appear on FHP's books, and of such
beneficial owner and (b) the class and number of shares of FHP which are owned
beneficially and of record by such stockholder and such beneficial owner.
A copy of FHP's Annual Report on Form 10-K to the Commission for the fiscal
year ended June 30, 1996, excluding certain of the exhibits thereto, may be
obtained without charge, by writing to FHP International Corporation, Investor
Relations Department, P.O. Box 25186, Santa Ana, California 92799-5186.
EXPERTS
The consolidated financial statements and schedule of PacifiCare Health
Systems, Inc. as of September 30, 1995 and for each of the three years in the
period ended September 30, 1995, which appear in PacifiCare's Annual Report on
Form 10-K, as amended, incorporated herein by reference and which are referred
to and made a part of this Joint Proxy Statement/Prospectus and Registration
Statement, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon and incorporated herein by reference and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The consolidated balance sheet of N-T Holdings, Inc. and subsidiaries as of
August 31, 1996, appearing in this Joint Proxy Statement/Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
The consolidated financial statements of FHP as of June 30, 1996 and 1995
and for each of the three years in the period ended June 30, 1996 included in
this Joint Proxy Statement/Prospectus have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein, and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of PacifiCare Holding Class A and Class B Common
and PacifiCare Holding Preferred offered hereby will be passed upon for
PacifiCare Holding by Cooley Godward LLP, Palo Alto, California. Certain legal
matters in connection with the Mergers will be passed upon for FHP by Sheppard,
Mullin, Richter & Hampton LLP, Los Angeles, California.
133
<PAGE>
FUTURE STOCKHOLDER PROPOSALS
If the Mergers are consummated, an annual meeting of the stockholders of
PacifiCare Holding is expected to be held in 1998. If the Mergers are not
consummated, the 1997 Annual Meeting of Stockholders of PacifiCare is expected
to be held on or about March 5, 1997.
Subject to the foregoing, if any PacifiCare Holding stockholder intends to
present a proposal at the 1998 PacifiCare Holding Annual Meeting and wishes to
have such proposal considered for inclusion in the proxy materials for such
meeting, such holder must submit the proposal to the Secretary of PacifiCare
Holding in writing so as to be received at the executive offices of PacifiCare
Holding by 120 days prior to the anticipated mailing date of proxy materials for
such meeting. The PacifiCare Holding Bylaws require that notice of nominations
of persons for election to the PacifiCare Holding Board of Directors, other than
those made by or at the direction of the PacifiCare Holding Board of Directors,
must be received no later than 90 days before an Annual Meeting. The notice must
present certain information concerning the nominee and the stockholder making
the nomination. The notice also must include the nominee's written consent to
being a nominee and to serving if elected. Notices should be sent to the
Corporate Secretary, PacifiCare Health Systems, Inc., 5995 Plaza Drive, Cypress,
California 90630-5028. Such proposals must also meet the other requirements of
the rules of the Commission relating to stockholders' proposals. In the event
the Mergers are not consummated, the only stockholder proposals eligible to be
considered for inclusion in the proxy materials for the 1997 Annual Meeting of
PacifiCare or FHP, as the case may be, will be those which were duly submitted
to the Corporate Secretary of PacifiCare by September 30, 1996, (which is 120
days prior to the anticipated mailing date of proxy materials for such meeting)
or the Corporate Secretary of FHP by June 20, 1997 (which is 120 days prior to
the anticipated mailing date of proxy materials for such meeting), as the case
may be.
134
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Shareholders and Board of Directors
N-T Holdings, Inc.
We have audited the accompanying consolidated balance sheet of N-T Holdings,
Inc. and subsidiaries as of August 31, 1996. This consolidated balance sheet is
the responsibility of N-T Holdings, Inc.'s management. Our responsibility is to
express an opinion on this consolidated balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the consolidated balance sheet provides a reasonable
basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the consolidated financial position of N-T Holdings, Inc. and
subsidiaries as of August 31, 1996, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
September 9, 1996
F-1
<PAGE>
N-T HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AUGUST 31, 1996
<TABLE>
<S> <C>
Assets
Cash............................................................................... $ 1,200
---------
Total assets................................................................. $ 1,200
---------
---------
Shareholder's equity
Common stock, par value $.001 per share; 1,000 shares authorized; 200 shares
issued............................................................................ $ --
Additional paid-in capital......................................................... 1,200
---------
Total shareholder's equity................................................... $ 1,200
---------
---------
</TABLE>
See accompanying notes.
F-2
<PAGE>
N-T HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEET
AUGUST 31, 1996
1. BACKGROUND OF ORGANIZATION
N-T Holdings, Inc. ("PacifiCare Holding") was incorporated on August 2,
1996, for the purpose of effectuating the combination of PacifiCare Health
Systems, Inc. ("PacifiCare") and FHP International Corporation ("FHP"), in
accordance with the terms of the Agreement and Plan of Reorganization dated as
of August 4, 1996, as amended as of September 17, 1996 (the "Reorganization
Agreement"). PacifiCare Holding has organized two wholly owned subsidiaries in
accordance with the Reorganization Agreement and has not conducted business or
activity other than in connection with the Reorganization Agreement (related
expenses are the responsibility of PacifiCare and FHP).
2. SHAREHOLDER'S EQUITY
The initial authorized capital stock of PacifiCare Holding consists of 1,000
shares of Common Stock, par value $.001 per share. Two hundred shares have been
issued and are outstanding. Immediately prior to the Effective Time, PacifiCare
Holding's Certificate of Incorporation will be amended to increase the total
number of authorized shares of capital stock to 100,000,000 shares of PacifiCare
Holding Class A Common Stock, par value $0.01, 100,000,000 shares of PacifiCare
Holding Class B Common Stock, par value $0.01, and 40,000,000 shares of
PacifiCare Holding Preferred Stock, par value $0.01.
3. REORGANIZATION AGREEMENT
The Reorganization Agreement, which has been approved by the board of
directors of each company, calls for holders of FHP Common Stock to receive
$17.50 in cash and a mix of PacifiCare Holding Class A Common Stock and
PacifiCare Holding Class B Common Stock determined by a formula set forth in the
Reorganization Agreement. Holders of FHP Preferred Stock will receive either (i)
the right to receive 0.50 shares of PacifiCare Holding Series A Preferred Stock
and $14.113 in cash (the "Series A Merger Consideration"), if the holders of FHP
Preferred Stock approve an amendment to the FHP Certificate of Incorporation
(the "Series A Amendment"), or (ii) $25.00 in cash or a mix of cash, PacifiCare
Holding Class A Common Stock and PacifiCare Holding Class B Common Stock as
determined by a formula set forth in the Reorganization Agreement, if the
holders of FHP Preferred Stock do not approve such amendment (and no Irrevocable
Elections are made). If the Series A Amendment is not approved, such shares of
FHP Preferred Stock as to which an Irrevocable Election is made would be
exchanged for the Series A Merger Consideration. Each outstanding share of
PacifiCare Class A Common Stock and PacifiCare Class B Common Stock will be
converted into the right to receive one share of PacifiCare Holding Class A
Common Stock and PacifiCare Holding Class B Common Stock, respectively. All
issued shares of the capital stock of PacifiCare Holding immediately prior to
the Effective Time will be canceled upon completion of the mergers.
PacifiCare Holding expects to finance the Cash Consideration (expected to
approximate $1.0 billion) and related fees and expenses (expected to approximate
$105 million) through a $1.5 billion credit facility to be provided by Bank of
America and BA Securities pursuant to a commitment letter issued by them.
The Reorganization Agreement is subject to approval by PacifiCare and FHP
stockholders, various Federal and state regulatory approvals, and other
customary closing conditions. The transaction is expected to close in January
1997.
F-3
<PAGE>
FHP INTERNATIONAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
Consolidated Balance Sheets, June 30, 1996 and 1995.................................................... F-5
Consolidated Statements of Income for the years ended June 30, 1996, 1995 and 1994..................... F-6
Consolidated Statements of Stockholders' Equity for the years ended June 30, 1996, 1995 and 1994....... F-7
Consolidated Statements of Cash Flows for the years ended June 30, 1996, 1995 and 1994................. F-9
Notes to Consolidated Financial Statements............................................................. F-10
Independent Auditors' Report........................................................................... F-30
</TABLE>
F-4
<PAGE>
FHP INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1996 1995
----------- -----------
(AMOUNTS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Cash and cash equivalents (Note 1)........................ $ 166,873 $ 299,144
Short-term investments (Notes 1 and 2).................... 187,919 157,220
Accounts receivable (net of allowance for doubtful
accounts of $18,839 and $23,617 at June 30, 1996 and
1995, respectively) (Note 1)............................ 141,537 141,840
Prepaid expenses and other current assets................. 33,736 44,091
Deferred income taxes (Notes 1 and 7)..................... 49,162 31,984
----------- -----------
Total current assets................................ 579,227 674,279
Property and equipment, net (Notes 1 and 3)............... 231,428 229,765
Assets held for sale (Notes 1 and 13)..................... 16,470 138,164
Long-term investments (Notes 1 and 2)..................... 36,470 71,492
Restricted investments (Notes 1 and 2).................... 90,499 105,482
Goodwill and other intangibles, net (Notes 1 and 12)...... 1,028,374 1,059,507
Other assets (Notes 1, 7 and 8)........................... 31,411 37,127
----------- -----------
Total assets........................................ $ 2,013,879 $ 2,315,816
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term obligations (Notes 1 and
6)...................................................... $ 30,097 $ 30,168
Accounts payable (Note 1)................................. 50,979 64,762
Medical claims payable (Notes 1 and 4).................... 367,872 341,222
Accrued salaries and employee benefits (Note 8)........... 71,986 77,716
Unearned premiums (Note 1)................................ 24,713 207,961
Restructuring reserve (Note 13)........................... 14,615 15,038
Income taxes payable and other current liabilities (Notes
1, 5 and 7)............................................. 79,132 15,791
----------- -----------
Total current liabilities........................... 639,394 752,658
Long-term obligations (Notes 1 and 6)..................... 104,184 337,817
Other liabilities (Notes 5 and 8)......................... 102,672 85,200
----------- -----------
Total liabilities................................... 846,250 1,175,675
----------- -----------
Commitments and contingencies (Note 9)
Stockholders' equity:
Series A Convertible and Series B Preferred Stock $0.05
par value; 40,000,000 shares authorized; issued and
outstanding 21,040,307 (Series A) at June 30, 1996 and
1995, and 79,218 (Series B) at June 30, 1995; aggregate
liquidation preference $526,033 and $526,027 (Series A)
at June 30, 1996 and 1995, respectively, and $1,999
(Series B) at June 30, 1995 (Notes 1, 10 and 12)....... 1,052 1,056
Common Stock, $0.05 par value; 100,000,000 shares
authorized; issued and outstanding 40,789,528 and
40,220,941 shares at June 30, 1996 and 1995,
respectively (Notes 1, 8, 10 and 12)................... 2,039 2,011
Paid-in capital......................................... 938,478 927,882
Unrealized holding losses on available-for-sale
investments, net of tax effect of $1,602 (1996) and
$1,232 (1995) (Note 2)................................. (2,306) (1,446)
Retained earnings....................................... 228,366 210,638
----------- -----------
Total stockholders' equity.......................... 1,167,629 1,140,141
----------- -----------
Total liabilities and stockholders' equity.......... $ 2,013,879 $ 2,315,816
----------- -----------
----------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
FHP INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------
<S> <C> <C> <C>
1996 1995 1994
------------ ------------ ------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA)
Revenue (Note 1)........................................................ $ 4,179,284 $ 3,909,380 $ 2,472,958
Expenses (Note 1):
Primary health care:
Medical services.................................................... 1,617,733 1,553,955 923,560
Hospital services................................................... 1,395,351 1,227,392 839,980
Dental, optometry, pharmacy and other primary health care
services........................................................... 392,504 340,182 199,572
Other health care..................................................... 125,340 116,960 94,577
General, administrative and marketing................................. 510,613 521,702 332,249
OPM reserve charge (Note 9)........................................... 45,000
Provision for restructuring (Note 13)................................. 9,659 75,110
------------ ------------ ------------
4,096,200 3,835,301 2,389,938
------------ ------------ ------------
Operating income.................................................. 83,084 74,079 83,020
Interest income......................................................... 36,174 32,079 20,365
Interest expense (Notes 1 and 6)........................................ (21,141) (25,972) (6,565)
------------ ------------ ------------
Income before provision for income taxes................................ 98,117 80,186 96,820
Provision for income taxes (Notes 1 and 7).............................. 53,964 42,894 37,510
------------ ------------ ------------
Net income........................................................ 44,153 37,292 59,310
Preferred stock dividends (Note 10)..................................... 26,425 25,337 1,032
------------ ------------ ------------
Net income attributable to Common Stock................................. $ 17,728 $ 11,955 $ 58,278
------------ ------------ ------------
------------ ------------ ------------
Earnings per share attributable to Common Stock (Note 11)............... $ 0.43 $ 0.29 $ 1.71
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
FHP INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
PREFERRED COMMON PREFERRED COMMON PAID-IN
SHARES SHARES STOCK STOCK CAPITAL
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
BALANCE AT JULY 1, 1993................................ 32,836 $ -- $ 1,642 $ 222,375
Stock options exercised (Note 8)....................... 356 18 2,697
Income tax benefit from exercise of stock
options.............................................. 3,229
Issuance of Series A Convertible Preferred Stock (Notes
10 and 12)........................................... 21,032 1,052 524,741
Issuance of Series B Preferred Stock (Notes 10 and
12).................................................. 33 1 820
Issuance of Common Stock (Notes 10 and 12)............. 6,312 316 161,954
Dividends on Series A Convertible and Series B
Preferred Stock (Note 10)............................
Unrealized holding gains (losses), net of taxes (Note
2)...................................................
Net income.............................................
----------- ----------- ----------- ----------- ----------
BALANCE AT JUNE 30, 1994............................... 21,065 39,504 1,053 1,976 915,816
Stock options exercised (Note 8)....................... 640 31 6,321
Income tax benefit from exercise of stock
options.............................................. 2,530
Issuance of Series A Convertible Preferred Stock (Notes
10 and 12)........................................... 9 213
Issuance of Series B Preferred Stock (Notes 10 and
12).................................................. 46 3 1,156
Issuance of Common Stock (Notes 10 and 12)............. 77 4 1,846
Dividends on Series A Convertible and Series B
Preferred Stock (Note 10)............................
Unrealized holding gains (losses), net of taxes (Note
2)...................................................
Net income.............................................
----------- ----------- ----------- ----------- ----------
BALANCE AT JUNE 30, 1995............................... 21,120 40,221 1,056 2,011 927,882
Stock options exercised (Note 8)....................... 486 24 6,398
Income tax benefit from exercise of stock
options.............................................. 4,132
Redemption of Series B Preferred Stock (Note 10)....... (79) (4) (1,976)
Employee Stock Purchase Plan transactions (Note 8)..... 83 4 2,042
Dividends on Series A Convertible and Series B
Preferred Stock (Note 10)............................
Unrealized holding gains (losses), net of taxes (Note
2)...................................................
Net income.............................................
----------- ----------- ----------- ----------- ----------
BALANCE AT JUNE 30, 1996............................... 21,041 40,790 $ 1,052 $ 2,039 $ 938,478
----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-7
<PAGE>
FHP INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
UNREALIZED TOTAL
RETAINED HOLDING STOCKHOLDERS'
EARNINGS LOSSES EQUITY
---------- ----------- ----------------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
BALANCE AT JULY 1, 1993................................................ $ 140,405 $ -- $ 364,422
Stock options exercised (Note 8)....................................... 2,715
Income tax benefit from exercise of stock
options............................................................... 3,229
Issuance of Series A Convertible Preferred Stock (Notes 10 and 12)..... 525,793
Issuance of Series B Preferred Stock (Notes 10 and 12)................. 821
Issuance of Common Stock (Notes 10 and 12)............................. 162,270
Dividends on Series A Convertible and Series B Preferred Stock (Note
10)................................................................... (1,032) (1,032)
Unrealized holding gains (losses), net of taxes (Note 2)............... (4,392) (4,392)
Net income............................................................. 59,310 59,310
---------- ----------- ----------------
BALANCE AT JUNE 30, 1994............................................... 198,683 (4,392) 1,113,136
Stock options exercised (Note 8)....................................... 6,352
Income tax benefit from exercise of stock
options............................................................... 2,530
Issuance of Series A Convertible Preferred Stock (Notes 10 and 12)..... 213
Issuance of Series B Preferred Stock (Notes 10 and 12)................. 1,159
Issuance of Common Stock (Notes 10 and 12)............................. 1,850
Dividends on Series A Convertible and Series B Preferred Stock (Note
10)................................................................... (25,337) (25,337)
Unrealized holding gains (losses), net of taxes (Note 2)............... 2,946 2,946
Net income............................................................. 37,292 37,292
---------- ----------- ----------------
BALANCE AT JUNE 30, 1995............................................... 210,638 (1,446) 1,140,141
Stock options exercised (Note 8)....................................... 6,422
Income tax benefit from exercise of stock
options............................................................... 4,132
Redemption of Series B Preferred Stock (Note 10)....................... (1,980)
Employee Stock Purchase Plan transactions (Note 8)..................... 2,046
Dividends on Series A Convertible and Series B Preferred Stock (Note
10)................................................................... (26,425) (26,425)
Unrealized holding gains (losses), net of taxes (Note 2)............... (860) (860)
Net income............................................................. 44,153 44,153
---------- ----------- ----------------
BALANCE AT JUNE 30, 1996............................................... $ 228,366 $ (2,306) $ 1,167,629
---------- ----------- ----------------
---------- ----------- ----------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-8
<PAGE>
FHP INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1996 1995 1994
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Operating Activities:
Net income.................................................................... $ 44,153 $ 37,292 $ 59,310
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
OPM reserve charge.......................................................... 45,000
Provision for restructuring................................................. 9,659 75,110
Depreciation and amortization............................................... 71,743 80,065 45,271
(Decrease) increase in allowance for doubtful accounts...................... (4,778) 10,169 6,301
Loss on disposal of assets.................................................. 6,292 4,757 4,954
Gain on sale of available-for-sale investments.............................. (1,498) (5,232)
Loss on sale of available-for-sale investments.............................. 277 880
Deferred income taxes....................................................... (9,689) (25,118) 2,630
Effect on cash of changes in operating assets and liabilities, net of
effects from acquisitions in 1995 and 1994:
Accounts receivable..................................................... 5,081 (39,917) (30,051)
Prepaid expenses and other current assets............................... 10,355 12,596 (18,099)
Other assets............................................................ (2,250) (4,279) 47
Accounts payable........................................................ (13,783) (29,963) 8,060
Medical claims payable.................................................. 26,650 57,610 12,138
Accrued salaries and employee benefits.................................. (5,730) (6,655) 7,931
Unearned premiums....................................................... (183,248) 175,223 (2,815)
Other liabilities....................................................... (4,696) (59,907) 6,292
--------- --------- ---------
Net cash (used in) provided by operating activities............................. (6,462) 282,631 101,969
--------- --------- ---------
Investing Activities:
Purchases of available-for-sale investments................................... (314,952) (519,090)
Proceeds from sales/maturities of available-for-sale investments.............. 334,249 600,487 1,167
Purchase of TakeCare, Inc., net of cash acquired.............................. (341,602)
Purchase of Colorado HMO, net of cash acquired................................ (755) (3,419)
Proceeds from sales of property and equipment................................. 159,990
Purchases of property and equipment........................................... (58,117) (72,096) (86,052)
--------- --------- ---------
Net cash provided by (used in) investing activities............................. 121,170 8,546 (429,906)
--------- --------- ---------
Financing Activities:
Proceeds from issuance of long-term obligations............................... 15,000 400,000
Payments on long-term obligations............................................. (231,174) (50,155) (20,136)
Exercise of stock options including tax benefit............................... 10,554 8,882 5,944
Redemption of Series B Preferred Stock........................................ (1,980)
Issuance of Common Stock through Employee Stock Purchase Plan................. 2,046
Cash dividends paid to preferred shareholders................................. (26,425) (26,331)
--------- --------- ---------
Net cash (used in) provided by financing activities............................. (246,979) (52,604) 385,808
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents............................ (132,271) 238,573 57,871
Cash and cash equivalents at beginning of year.................................. 299,144 60,571 2,700
--------- --------- ---------
Cash and cash equivalents at end of year........................................ $ 166,873 $ 299,144 $ 60,571
--------- --------- ---------
--------- --------- ---------
Supplemental cash flow information:
Interest payments (net of portion capitalized in 1995 and 1994)............... $ 20,130 $ 25,526 $ 4,695
Income tax payments (net of refunds).......................................... $ 34,725 $ 73,751 $ 34,583
Supplemental schedule of noncash investing and financing activities:
The Company purchased all of the outstanding common stock of TakeCare, Inc. in
exchange for Common Stock, Preferred Stock and cash as follows:
Total TakeCare acquisition cost........................................... $1,137,642
Cash acquired............................................................. (60,402)
Liabilities accrued....................................................... (46,754)
Common and Preferred Stock issued......................................... (688,884)
---------
Net cash paid............................................................. $ 341,602
---------
---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-9
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
FHP International Corporation (the "Company"), through its direct and
indirect subsidiaries, delivers managed health care services and sells indemnity
medical, group life, and workers' compensation insurance.
Most of the Company's subsidiaries are federally qualified, licensed health
maintenance organizations ("HMO") which provide comprehensive health care to
their members for a fixed monthly fee per member. In the course of providing
health care services to commercial and governmental employees, the Company
extends credit to various federal government agencies and hospitals, independent
physician groups, and to other health care providers and intermediaries located
in Arizona, California, Colorado, Illinois, Indiana, Kentucky, Nevada, New
Mexico, Ohio, Texas, Utah and Guam.
During fiscal year 1996, the Company formed a subsidiary, Talbert Medical
Management Corporation ("Talbert"), a physician practice management company and
formed several professional corporations (the "PCs"). The sole shareholder of
each PC is a licensed doctor or dentist. The PCs created by Talbert are located
in Arizona, California, Nevada and Utah. Together, Talbert and the PCs represent
the reorganization of substantially all of the Company's owned and operated
staff model operations. These actions collectively enable the PCs and Talbert to
do business with third party payors and other HMOs as well as with the Company's
contract model HMO. Talbert, which became operational January 1, 1996, is
approximately 92% owned by the Company and 8% owned by a group of management
investors.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. Talbert has direct or indirect unilateral and
perpetual control over the assets and operations of the PCs by means other than
owning the majority of voting stock. Talbert and the PCs have entered into 20 to
40 year practice management agreements. In addition, Talbert through its
management agreements with the PCs, has effectively assumed responsibility for
all operating expenses in return for the assignment of the revenue of the PCs.
As such, because of control by means other than equity ownership, consolidation
of the PCs is necessary to present fairly the financial position and results of
operations of Talbert. Control by Talbert is perpetual rather than temporary
because of: (i) the length of the original terms of the agreements; (ii) the
successive extension periods provided by the agreements; (iii) the continuing
investment of capital by the Company; (iv) the employment of the majority of the
nonphysician personnel; (v) the nature of the services provided to the PCs by
Talbert; and (vi) the provisions of a Share Control Agreement entered into by
each PC's shareholder and Talbert. The terms of the Share Control Agreement
require the shareholder: (i) to elect to the board of directors of the PCs only
persons approved by Talbert; (ii) to obtain written consent from Talbert to
approve or authorize any merger, consolidation or other reorganization, sale of
assets, or sale of common stock of the PCs; and (iii) give a right to purchase
any or all shares of the PCs to a person designated by Talbert.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
F-10
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REGULATORY REQUIREMENTS
The Company's regulated subsidiaries must comply with certain minimum
capital or tangible net equity requirements in each of the states in which they
operate. As of June 30, 1996, all of the Company's regulated subsidiaries were
in compliance with these requirements.
REVENUE RECOGNITION AND HEALTH CARE COSTS
Medicare risk contracts with the Health Care Financing Administration
("HCFA") provided 48%, 45% and 63% of revenue in fiscal years 1996, 1995 and
1994, respectively. The Company's HMOs are paid a prospectively determined per
capita monthly payment for each Medicare beneficiary enrolled in the HMOs. This
capitated payment is the projected actuarial equivalent of 95% of the amount
Medicare would have paid for the Medicare beneficiaries if they had received
services from a fee for service Medicare provider or supplier. The HMOs must
absorb any difference between the Medicare prepaid amounts and the actual costs
the HMOs incur for providing services and are, therefore, at risk.
Premiums from enrolled groups for prepaid health care are recognized as
revenue in the month in which the enrollees are entitled to care. Unearned
premiums represent cash received from employer groups and HCFA in advance of the
applicable period of coverage. Health care costs are recorded in the period when
services are provided to enrolled members, including estimates for contracted
medical specialists and hospital costs which have been incurred as of the
balance sheet date but not yet reported. The estimates for accrued health care
costs are based on historical studies of claims paid. The methods for making
such estimates and for establishing the resulting reserves are continually
reviewed and updated, and any adjustments resulting therefrom are reflected in
current operations. While the ultimate amount of claims and the related expenses
paid are dependent on future developments, management is of the opinion that the
liability for medical claims payable is adequate to cover such medical claims
and expenses.
ADVERTISING COSTS
Advertising expense was $31,895,000, $37,018,000 and $23,800,000 for the
fiscal years ended June 30, 1996, 1995 and 1994, respectively.
CASH EQUIVALENTS
The Company considers all highly-liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
SHORT-TERM, LONG-TERM AND RESTRICTED INVESTMENTS
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities." The Company has classified all of
its investment portfolio as "available-for-sale." In accordance with SFAS 115,
investments classified as available-for-sale are carried at fair value, and
unrealized gains or losses (net of applicable income taxes) are reported in a
separate caption of stockholders' equity.
Short-term, long-term, and restricted investments consist of U.S. Treasury
securities, certificates of deposit, and other marketable debt securities.
Long-term investments have maturities in excess of one year. Restricted
investments primarily include investments placed on deposit with various state
regulatory agencies to comply with regulatory requirements.
F-11
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of investments in marketable
securities and commercial premiums receivable. The Company's short-term
investments in marketable securities are managed by professional investment
managers within guidelines established by the Board of Directors, which, as a
matter of policy, limit the amounts which may be invested in any one issuer.
Concentrations of credit risk with respect to commercial premiums receivable are
limited due to the large number of employer groups comprising the Company's
customer base. In management's opinion, the Company had no significant
concentrations of credit risk at June 30, 1996.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's consolidated balance sheet includes the following financial
instruments: cash and cash equivalents, trade accounts and notes receivable,
trade accounts payable and long-term obligations. The Company considers the
carrying amounts of current assets and liabilities in the consolidated financial
statements to approximate the fair value for these financial instruments because
of the relatively short period of time between origination of the instruments
and their expected realization. The fair value, based on the quoted market price
as of June 30, 1996, of the Company's 7% Senior Notes due September 2003,
approximates $97,160,000. The Company considers that the carrying value of all
other long-term obligations approximates the fair value of such obligations due
to the variable nature of interest rates associated with the debt instruments.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are provided principally by the straight-line method over the estimated useful
lives of the respective classes of assets as follows: buildings, 20 to 40 years;
leasehold improvements, lesser of the useful lives (three to ten years) or the
lease term; and equipment and fixtures, three to ten years. Property and
equipment also includes capitalized interest expense of approximately $471,000
and $596,000 in fiscal years 1995 and 1994, respectively, associated with the
Company's major construction projects. There were no significant construction
projects in fiscal year 1996.
GOODWILL AND OTHER INTANGIBLES
Goodwill arose primarily from the purchase of TakeCare, Inc. ("TakeCare") on
June 17, 1994. Amortization is provided on a straight-line basis over periods
not exceeding 37 years. In addition to goodwill, other intangible assets
resulting from business acquisitions consist of the economic value of purchased
membership, customer contracts and covenants not-to-compete. Intangibles are
amortized on a straight-line basis over their estimated useful lives ranging
from 3 to 30 years. The Company periodically evaluates whether events and
circumstances have occurred which may affect the estimated useful life or the
recoverability of the remaining balance of its intangibles. At June 30, 1996,
the Company's management believed that no material impairment of goodwill or
other intangible assets existed. Amortization charged to operations amounted to
$32,064,000, $31,506,000 and $5,284,000 for fiscal years 1996, 1995 and 1994,
respectively. Accumulated amortization was $66,444,000, $34,738,000 and
$6,685,000 for the fiscal years ended June 30, 1996, 1995 and 1994,
respectively.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for income
taxes. Under this method, income taxes are recognized for (a) the amount of
taxes payable or refundable for the current year and (b) deferred tax
liabilities and assets for the future tax consequences of events that have been
F-12
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
recognized in the Company's financial statements or tax returns. The effects of
income taxes are measured based on enacted tax law and rates. Deferred tax
assets and liabilities are established for temporary differences between the
financial reporting basis and tax basis of the Company's assets and liabilities
at tax rates expected to be in effect when such assets or liabilities are
realized or settled.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS
TO BE DISPOSED OF
The Company accounts for the impairment and disposition of long-lived assets
in accordance with Statement of Financial Accounting Standards No. 121 ("SFAS
121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." In accordance with SFAS 121, long-lived assets to be
held are reviewed for events or changes in circumstances which indicate that
their carrying value may not be recoverable. In June 1995, the Company adopted a
plan of reorganization (the "Restructuring Plan") which included the disposition
of long-lived assets (Note 13). Assets held for sale are accounted for at the
lower of carrying amount or fair value, less costs to sell, since management has
committed to a plan to dispose of the assets.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation" provides an alternative to APB Opinion
No. 25 ("APB 25"). SFAS 123 encourages, but does not require, recognition
against earnings of compensation expense for grants of stock, stock options and
other equity instruments by employers (collectively, "options"), based on fair
value at the date of grant. SFAS 123 provides a methodology for the
determination of fair value; however, SFAS 123 also allows companies to continue
to measure compensation cost using the intrinsic value method of accounting
provided by APB 25. SFAS 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 as if it had been adopted. The Company intends to
continue with the intrinsic value method prescribed in APB 25 and make pro forma
disclosures of net income and earnings per share as if the fair value method of
accounting (as defined in SFAS 123) had been applied beginning in fiscal year
1997.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates. Principal
areas requiring the use of estimates include: determination of allowances for
doubtful accounts receivable, medical claims payable (Note 4), professional and
general liability, reserves relating to OPM contracts (Note 9) and restructuring
reserves (Note 13).
F-13
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OTHER ASSETS
The principal components of other assets are as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1996 1995
--------- ---------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Deferred income taxes (Note 7)...................................... $ 13,836 $ 21,007
Cash surrender value of life insurance policies (Note 8)............ 12,551 6,902
Deposits............................................................ 1,068 3,608
Notes receivable.................................................... 837 2,999
Other............................................................... 3,119 2,611
--------- ---------
Total other assets.................................................. $ 31,411 $ 37,127
--------- ---------
--------- ---------
</TABLE>
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1996
financial statement presentation.
F-14
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--INVESTMENTS
Gross unrealized gains and losses and a comparison of amortized cost and
estimated fair value are presented in the table below:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
JUNE 30, 1996:
Classified as short-term:
U.S. Government and its agencies............................. $ 139,029 $ 91 $ (318) $ 138,802
Corporate obligations........................................ 40,530 16 (171) 40,375
Municipal obligations........................................ 7,506 8 (11) 7,503
Other........................................................ 1,254 1 (16) 1,239
----------- ----------- ----------- -----------
Total short-term........................................... 188,319 116 (516) 187,919
----------- ----------- ----------- -----------
Classified as long-term:
U.S. Government and its agencies............................. 28,080 2 (733) 27,349
Corporate obligations........................................ 8,288 18 (190) 8,116
Other........................................................ 1,006 (1) 1,005
----------- ----------- ----------- -----------
Total long-term............................................ 37,374 20 (924) 36,470
----------- ----------- ----------- -----------
Classified as restricted investments:
U.S. Government and its agencies............................. 85,841 46 (2,405) 83,482
Corporate obligations........................................ 5,948 24 (269) 5,703
Certificates of deposit...................................... 1,025 1,025
Money market funds........................................... 289 289
----------- ----------- ----------- -----------
Total restricted........................................... 93,103 70 (2,674) 90,499
----------- ----------- ----------- -----------
Total.................................................... $ 318,796 $ 206 $ (4,114) $ 314,888
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
JUNE 30, 1995:
Classified as short-term:
U.S. Government and its agencies............................. $ 117,913 $ 382 $ (619) $ 117,676
Corporate obligations........................................ 22,503 (175) 22,328
Municipal obligations........................................ 11,605 25 (20) 11,610
Other........................................................ 5,649 12 (55) 5,606
----------- ----------- ----------- -----------
Total short-term........................................... 157,670 419 (869) 157,220
----------- ----------- ----------- -----------
Classified as long-term:
U.S. Government and its agencies............................. 49,329 438 (1,493) 48,274
Corporate obligations........................................ 15,257 74 (114) 15,217
Other........................................................ 8,072 4 (75) 8,001
----------- ----------- ----------- -----------
Total long-term............................................ 72,658 516 (1,682) 71,492
----------- ----------- ----------- -----------
Classified as restricted investments:
U.S. Government and its agencies............................. 103,454 645 (1,722) 102,377
Certificates of deposit...................................... 2,575 9 2,584
Money market funds........................................... 515 6 521
----------- ----------- ----------- -----------
Total restricted........................................... 106,544 660 (1,722) 105,482
----------- ----------- ----------- -----------
Total.................................................... $ 336,872 $ 1,595 $ (4,273) $ 334,194
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
F-15
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Realized gains and (losses) on available-for-sale investments are calculated
on the specific identification method and were $1,498,000 and ($277,000),
respectively, in fiscal year 1996 and $5,232,000 and ($880,000), respectively,
in fiscal year 1995.
The contractual maturities of short-term, long-term, and restricted
investments at June 30, 1996, were as follows:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Due within one year........................................................... $ 125,342 $ 125,031
Due after one year, but within five years..................................... 145,193 144,101
Due after five years, but within ten years.................................... 32,525 30,387
Due after ten years........................................................... 15,736 15,369
----------- -----------
Total contractual maturities.................................................. $ 318,796 $ 314,888
----------- -----------
----------- -----------
</TABLE>
The Company also determined that investments, classified as short-term, are
available for use in current operations and, accordingly, classified such
investments as current assets without regard to the investments' contractual
maturity dates.
The fair value of short-term, long-term and restricted investments is
estimated based on quoted market prices.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1996 1995
----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Land.......................................................................... $ 28,623 $ 26,002
Buildings..................................................................... 59,049 60,231
Leasehold improvements........................................................ 49,085 42,779
Equipment and fixtures........................................................ 245,438 232,250
Construction in progress...................................................... 2,408 9,920
----------- -----------
384,603 371,182
Less accumulated depreciation and amortization................................ 153,175 141,417
----------- -----------
Total property and equipment, net............................................. $ 231,428 $ 229,765
----------- -----------
----------- -----------
</TABLE>
Total depreciation and amortization expense related to property and
equipment was $39,679,000, $48,559,000 and $39,987,000 for fiscal years 1996,
1995 and 1994, respectively.
F-16
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--MEDICAL CLAIMS PAYABLE
Activity in the liability for medical claims payable is summarized below:
<TABLE>
<CAPTION>
(AMOUNTS
IN THOUSANDS)
-------------
<S> <C>
BALANCE AT JULY 1, 1993.................................................................. $ 149,060
Incurred related to:
Current year--1994................................................................... 610,904
Prior years.......................................................................... 1,561
-------------
Total incurred......................................................................... 612,465
-------------
Paid related to:
Current year--1994................................................................... (461,122)
Prior years.......................................................................... (137,435)
-------------
Total paid............................................................................. (598,557)
-------------
TakeCare, Inc. medical claims payable (Note 12)........................................ 120,644
-------------
BALANCE AT JUNE 30, 1994................................................................. 283,612
Incurred related to:
Current year--1995................................................................... 1,140,842
Prior years.......................................................................... 15,530
-------------
Total incurred......................................................................... 1,156,372
-------------
Paid related to:
Current year--1995................................................................... (842,310)
Prior years.......................................................................... (256,452)
-------------
Total paid............................................................................. (1,098,762)
-------------
BALANCE AT JUNE 30, 1995................................................................. 341,222
Incurred related to:
Current year--1996................................................................... 1,333,948
Prior years.......................................................................... 18,052
-------------
Total incurred......................................................................... 1,352,000
-------------
Paid related to:
Current year--1996................................................................... (1,017,199)
Prior years.......................................................................... (308,151)
-------------
Total paid............................................................................. (1,325,350)
-------------
BALANCE AT JUNE 30, 1996................................................................. $ 367,872
-------------
-------------
</TABLE>
NOTE 5--OTHER LIABILITIES
From January 1984 through March 1986, the Company maintained commercial
insurance on a claims occurrence basis with nominal deductibles. From April 1986
through May 1996, the Company maintained commercial insurance on a claims made
basis. For this period, the Company's policy provided $50,000,000 of
professional liability insurance with self-insured retention of $2,000,000 per
occurrence and $12,000,000 per year in the aggregate. Effective May 31, 1996,
the Company procured $50,000,000 of professional liability insurance on a claims
made basis with a $100,000 deductible per occurrence. Effective February 15,
1996, Talbert purchased $50,000,000 of separate professional liability insurance
with no annual deductibles for coverage on a claims made basis.
F-17
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the period during which the Company was self-insured, the Company
continues to maintain reserves for professional liability claims, including
deductibles. These reserves have been actuarially computed on a present value
basis using a discount rate of 7% and amount to approximately $37,284,000 and
$35,525,000 at June 30, 1996 and 1995, respectively. Such amounts are allocated
between other current liabilities and other liabilities based on estimates of
the amounts of claims which are expected to be paid during the subsequent fiscal
year (Note 9).
Other liabilities also include approximately $29,043,000 and $30,001,000 of
reserves for losses and loss adjustment expenses at June 30, 1996 and 1995,
respectively, associated with the Company's insurance operations. These reserves
are estimates based on actuarial computations and industry standards for the
eventual costs of claims incurred but not settled, less estimated reinsurance
recoverable from policies in effect with third party reinsurers.
As claims are settled, as amounts required to settle become known, and as
anticipated claims are actuarially revised, the professional liability and loss
reserve expenses and liabilities are adjusted accordingly.
NOTE 6--LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1996 1995
------------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
7% Senior Notes due September 2003, interest payable semi-annually.......... $ 100,000 $ 100,000
Term loan under bank credit agreement, due in semi-annual installments of
$15,000,000 plus interest, at floating rates averaging 5.8% and 6.5% in
1996 and 1995, respectively............................................... 34,000 150,000
Revolving loan under bank credit agreement.................................. 115,000
Other....................................................................... 281 2,985
------------- -----------
Total................................................................... 134,281 367,985
Less current portion...................................................... 30,097 30,168
------------- -----------
Total long-term obligations............................................... $ 104,184 $ 337,817
------------- -----------
------------- -----------
</TABLE>
Scheduled maturities of long-term obligations are as follows:
<TABLE>
<CAPTION>
(AMOUNTS IN
YEARS ENDING JUNE 30: THOUSANDS)
- ------------------------------------------------------------------------------- -------------
<S> <C>
1997........................................................................... $ 30,097
1998........................................................................... 4,034
1999........................................................................... 119
2000........................................................................... 31
2001...........................................................................
Later years.................................................................... 100,000
-------------
Total scheduled maturities..................................................... $ 134,281
-------------
-------------
</TABLE>
The Company has a $350 million credit agreement, as amended, ("Credit
Agreement") with a syndicate of banks which provides a $200 million revolving
credit facility and a $150 million term loan
F-18
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
facility. The Credit Agreement expires March 31, 2000. Prime rate, London
Interbank Offered Rate based, or competitive bid (revolving credit facility
only) interest rate options are available for borrowings under the Credit
Agreement. In addition, a facility fee of 0.125% is payable, regardless of
usage, on the $200 million revolving credit facility portion of the Credit
Agreement.
The Credit Agreement contains financial and other covenants. The Company was
in compliance with these covenants as of June 30, 1996.
NOTE 7--INCOME TAXES
The components of the provision for income taxes are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1996 1995 1994
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................................ $ 52,186 $ 53,965 $ 27,806
State.............................................................. 11,110 12,590 5,999
Guam............................................................... 357 1,457 1,075
--------- --------- ---------
Total current provision.............................................. 63,653 68,012 34,880
--------- --------- ---------
Deferred:
Federal............................................................ (8,633) (20,964) 2,201
State.............................................................. (1,056) (4,154) 429
--------- --------- ---------
Total deferred (benefit) provision................................... (9,689) (25,118) 2,630
--------- --------- ---------
Total provision for income taxes..................................... $ 53,964 $ 42,894 $ 37,510
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes differs from the amount of tax determined by
applying the Federal statutory rate to pretax income. The components of this
difference are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ----------- --------- ----------- --------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Taxes on income at Federal statutory tax
rate........................................ $ 34,341 35% $ 28,065 35% $ 33,887 35%
State income taxes, net of Federal tax
benefit..................................... 6,535 7 5,484 6 4,178 4
Goodwill amortization......................... 9,841 10 8,573 11
Other, net.................................... 3,247 3 772 1 (555)
-- -- --
--------- --------- ---------
Total provision for income taxes.............. $ 53,964 55% $ 42,894 53% $ 37,510 39%
-- -- --
-- -- --
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-19
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of significant items comprising the Company's net deferred
tax assets are as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1996 1995
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Reserves not currently deductible............................................ $ 55,649 $ 30,270
Restructuring charges........................................................ 10,275 37,974
Vacation and other deferred compensation..................................... 7,656 6,125
State income taxes........................................................... 403 (99)
Other........................................................................ 137 660
---------- ----------
Total deferred tax assets.................................................. 74,120 74,930
Deferred tax liabilities:
Difference between book and tax bases of property............................ (11,122) (21,939)
---------- ----------
Net deferred tax assets.................................................... $ 62,998 $ 52,991
---------- ----------
---------- ----------
</TABLE>
Management believes that no valuation allowance was required as of and for
the years ended June 30, 1996 and 1995.
NOTE 8--EMPLOYEE BENEFITS
The Company has a defined contribution pension plan ("Pension Plan") and an
Employee Stock Ownership Plan ("ESOP") covering substantially all employees.
Under the provisions of these plans, the Company contributed into trusts for the
benefit of employees an amount equal to 12% of eligible annual compensation, as
defined, of all plan participants (8% to the Pension Plan and 4% to the ESOP).
The Company's ESOP contribution is discretionary. Effective January 1, 1995, the
contribution rate was reduced to 8% of eligible annual compensation, as defined
(6% to the Pension Plan and 2% to the ESOP).
Effective January 1, 1996, the Company ceased to make contributions to the
Pension Plan. All participants in the Pension Plan vested as of December 31,
1995. The Company continued to contribute 2% to the ESOP. Participants in the
ESOP do not vest until they have completed five years of service with the
Company. Nonvested contributions, which are forfeited upon an employee's
termination, are treated as a reduction in the amount of the Company's
contribution. The Company currently makes quarterly contributions to the ESOP to
fund quarterly purchases of Company Common Stock by the ESOP on the open market.
For fiscal years 1996, 1995 and 1994, the Company contributed $6,395,000,
$9,315,000 and $9,140,000, respectively, for this purpose. The combined
contribution expenses for the Pension Plan and ESOP (including the Company
401(k) match discussed below) were $20,954,000, $32,844,000 and $35,020,000 for
fiscal years 1996, 1995 and 1994, respectively.
The ESOP has a 401(k) feature whereby employees may voluntarily contribute
before-tax earnings and receive matching Company contributions. The 401(k)
offers several investment choices. Employees vest in the Company match after
five years of service. Before January 1, 1996, employees could contribute
between 1% and 10% of eligible compensation (1% to 5% for highly compensated
employees). Employee contributions invested in the Company's Common Stock were
matched by the Company at the rate of $0.25 per $1.00, up to a maximum of $500
per year. Effective January 1, 1996,
F-20
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the maximum employee contribution for highly compensated employees increased to
6%. Also, Company matching contributions increased to $0.50 per $1.00 up to a
maximum of 6% of eligible compensation for employees with less than five years
of service and increased to $1.00 per $1.00 up to a maximum of 6% of eligible
compensation for employees with five or more years of service.
In March 1996, approximately 8% of the stock in Talbert was purchased by
certain management employees of Talbert and the Company for $0.01 per share.
Shares held by the management employees are restricted and vest incrementally
each July 1 until July 1, 1999, conditional upon attaining certain operating
results and the passing of certain prospective dates. Also, Talbert established
a non-qualified stock option plan for the purpose of retaining certain key
employees.
Under an Executive Incentive Plan (the "Plan"), the Company is authorized to
grant restricted stock awards, incentive stock options, nonqualified stock
options, and bonus awards to directors, officers, key employees, consultants,
and other agents. Under the terms of the Plan, the exercise price of the stock
options must be equal to the fair market value of the Company's Common Stock at
the date of grant. All stock options granted by the Company through June 30,
1996, were nonqualified.
Beginning July 1, 1992, the first of a series of four annual stock option
grants were made to certain executives under the Plan. These grants are intended
to provide a strong linkage between long-term incentives and the Company's
financial performance. Accelerated vesting of each of these stock options is
tied directly to growth in the Company's earnings per share ("EPS"). Stock
options for 180,000, 300,000, 435,000 and 1,085,000 shares were granted under
this plan on July 1, 1995, 1994, 1993 and 1992, respectively. Each year's stock
option grant allows the optionee up to six consecutive annual opportunities for
accelerated vesting of portions of the employee's stock options only if the
Company's EPS exceeds both: (1) EPS for the previous fiscal year and (2) average
EPS for the two previous fiscal years. The terms of accelerated vesting for 70%,
45%, 25% and 10% of the stock options granted on July 1, 1992, 1993, 1994 and
1995 were met. If a stock option in the series does not become subject to
accelerated vesting by the sixth anniversary of its grant, the stock option
automatically becomes vested on the seventh anniversary of its grant. The
Company issued stock options to certain executives under the Plan on July 1,
1996. Upon consummation of the Merger Agreement with PacifiCare (Note 14), all
unvested options under the Plan will convert into equivalent options in
PacifiCare. The accelerated vesting feature discussed above will be replaced
with annual vesting in four equal installments, beginning July 1, 1997.
In addition to the options described above, the Company has granted other
options. All options granted are included in the following summary of stock
option activity for fiscal years 1996, 1995 and 1994:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Outstanding at beginning of year................................... 4,342,000 4,641,000 2,386,000
Granted.......................................................... 394,000 812,000 2,830,000
Cancelled........................................................ (438,000) (471,000) (219,000)
Exercised........................................................ (486,000) (640,000) (356,000)
--------------- --------------- ---------------
Outstanding at end of year......................................... 3,812,000 4,342,000 4,641,000
--------------- --------------- ---------------
--------------- --------------- ---------------
Exercisable at end of year......................................... 863,000 824,000 390,000
--------------- --------------- ---------------
--------------- --------------- ---------------
Price range of options outstanding at end of year.................. $1.16-$31.19 $1.16-$29.25 $1.16-$28.25
Price range of options exercised................................... $1.16-$27.63 $1.16-$27.63 $2.73-$27.63
</TABLE>
F-21
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At June 30, 1996, 1,224,000 shares remained available under the Plan for
future grants of stock awards and stock options. Outstanding stock options at
June 30, 1996, expire at the earlier of the date the stock option holder ceases
to be an employee or a director, or ten years after the date of grant, based on
the date of grant of the original stock options.
The Company established a deferred compensation plan (the "DCP") effective
January 1, 1996 (replacing the FHP, Inc. Deferred Compensation Plan for
Executives and Physicians which was terminated as of December 31, 1995), for
certain of its executives, physicians and non-employee directors, which is
designed to provide supplemental retirement income benefits. Employee
participants in the DCP may elect to defer receipt of up to 50% of their gross
annual salaries and 100% of their gross annual bonuses. Amounts deferred by
employees are included in other liabilities and these deferred amounts are
deemed to be invested in one or more mutual funds selected by the participants.
The DCP provides that non-employee directors may defer 0% to 100% of their
annual director fees, retainer fees and committee fees into the DCP. Amounts
deferred by employees and non-employee directors earn interest at a stated
Crediting Rate. The DCP provides a Crediting Rate for the 1996 plan year equal
to the Moody's Corporate Bond Yield Average (currently 7.6%). The DCP Committee
has the discretion to provide a Premium Rate in addition to the Crediting Rate.
The Crediting Rate, when added to the Premium Rate, equals the Preferred Rate.
The Premium Rate and Preferred Rate are declared for the coming year in October
prior to the annual deferral elections. The Premium Rate declared for the 1996
plan year is an additional 20% of the Crediting Rate, making the Preferred Rate
for the 1996 plan year 9.1%. The Preferred Rate vests after 5 years of service.
Upon a change in control of the Company, the participants will immediately be
vested in the Preferred Rate.
The Company established an Employee Stock Purchase Plan ("ESPP") in January
1995. The ESPP provides employees of the Company with an opportunity to purchase
the Company's Common Stock annually with after tax income set aside through
payroll deductions. Eligible employees may set aside up to a specified amount
from annual compensation to purchase shares of the Company's Common Stock at 85%
of the market price on the last day of each annual offering period. In December
1995 and January 1996, 82,845 shares of the Company's Common Stock were issued
to participants in the ESPP.
NOTE 9--COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases certain buildings and equipment under operating leases.
Future minimum rental payments required under operating leases that have initial
or remaining noncancellable lease terms in excess of one year as of June 30,
1996, are as follows:
<TABLE>
<CAPTION>
(AMOUNTS IN
YEARS ENDING JUNE 30: THOUSANDS)
- ----------------------------------------------------------------------------------------- -------------
<S> <C>
1997..................................................................................... $ 28,700
1998..................................................................................... 22,641
1999..................................................................................... 16,527
2000..................................................................................... 12,944
2001..................................................................................... 10,693
Later years.............................................................................. 34,576
-------------
Total minimum payments required...................................................... $ 126,081
-------------
-------------
</TABLE>
Total rental expense on operating leases aggregated $34,111,000, $34,956,000
and $28,663,000 for fiscal years 1996, 1995 and 1994, respectively.
F-22
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OPM AUDIT
The Company's HMO subsidiaries have contracts with the United States Office
of Personnel Management ("OPM") to provide or arrange managed health care
services under the Federal Employees Health Benefits Program ("FEHBP") for
federal employees, annuitants and their dependents. Periodically, the Company's
HMO subsidiaries are subject to audits by the Government to, among other things,
verify that premiums charged under OPM contracts are established in compliance
with community rating and other requirements under the FEHBP. Final reports from
such audits may recommend that OPM seek monetary recoveries from the Company for
amounts that may be substantial. As previously disclosed, in May 1993, after
conducting an audit of the Company's FEHBP contracts covering primarily the
years 1987 through 1991, OPM sent a draft audit report to the Company alleging
certain defective rating practices in certain regions. Following its evaluation
of the draft audit report, the Company indicated to OPM certain areas where it
believed the report to be inaccurate or based on misconceptions. Also, the
Company evaluated the availability of offsets and established reserves pending
issuance of a final audit report or further correspondence from OPM. A final
audit report has never been issued and the Company received no further
correspondence from the Government regarding the draft audit report until the
third quarter of fiscal year 1996.
In the third quarter of fiscal year 1996, the United States Department of
Justice (the "Government") notified the Company that based on the OPM draft
audit report and discussions with OPM personnel, the Government believed that
the Company may have violated the False Claims Act in its certifications to OPM
that the FEHBP received community rates for health care services provided in
certain regions during 1987 through 1991. No action has been commenced by the
Government, although the Government asserted in correspondence with the Company
dated April 25, 1996 that, at that time, the Government believed its actual
damages to be approximately $15 million. In False Claims Act actions, the
Government may seek trebled damages and a civil penalty of not less than $5,000
nor more than $10,000 for each separate alleged false claim. The Government has
indicated that it does not have any information that would lead it to believe
that the Company violated any criminal laws.
Accordingly, in the third quarter of fiscal year 1996, the Company increased
reserves by recording a pretax charge of $45 million ($28.7 million, net of
tax), in anticipation of negotiations to address existing and potential
governmental claims for the years 1987 through 1991, discussed above, which have
been and may be asserted in relation to the Company's contracts with OPM and for
possible OPM claims for subsequent years through 1996. The addition to reserves
resulted in a third quarter charge to net earnings of $0.68 per share.
LITIGATION
During the ordinary course of business, the Company and its subsidiaries
have become a party to pending and threatened legal actions and proceedings, a
significant number of which involve alleged claims of medical malpractice.
Management of the Company is of the opinion, taking into account its insurance
coverage and reserves that have been established, that the outcome of the
currently known legal actions and proceedings will not, singly or in the
aggregate, have a material effect on the consolidated financial position or
results of operations or cash flows of the Company and its subsidiaries.
SUBSEQUENT EVENT (UNAUDITED)
On November 19, 1996, Memorial Health Services, a California nonprofit
benefit corporation ("Memorial"), filed a Demand for Arbitration against FHP,
Inc. with the American Arbitration Association (the "Demand"). The Demand
alleges that the Company fraudulently and/or negligently
F-23
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
misrepresented and failed to disclose certain information in connection with
Memorial's purchase of a hospital in Fountain Valley, California from the
Company and its entry into a Capitation Contract with the Company. Memorial
alleges that it paid approximately $87 million for the hospital and the right to
exclusively serve FHP senior and commercial member populations at such hospital
and other Memorial facilities. Memorial claims that but for the Company's
alleged misrepresentations and nondisclosures, Memorial would not have purchased
the hospital nor entered into the Capitation Contract without a material
decrease in purchase price and an increase in the Capitation Fee for each FHP
member served. Memorial's claims for relief include claims for compensatory
damages in excess of $275 million, punitive damages in an amount to be
determined, and rescission of the hospital purchase contract and Capitation
Contract (together with compensatory and punitive damages up to the date of
rescission), plus, in each case, attorneys fees and costs incurred in
arbitration. The Company disputes the arbitrability of Memorial's claims and
believes that Memorial's claims are without merit. The Company intends to
vigorously defend against such claims. Management believes that resolution of
the Demand will not have a material adverse effect on the consolidated financial
position or results of operations or cash flows of the Company.
NOTE 10--STOCKHOLDERS' EQUITY
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, par value $0.05 per share and 40,000,000 shares of Preferred
Stock, par value $0.05 per share. Preferred Stock is designated either Series A
Cumulative Convertible Preferred Stock ("Series A Preferred Stock") or Series B
Adjustable Rate Cumulative Preferred Stock ("Series B Preferred Stock"). As a
result of the acquisition of TakeCare as of June 17, 1994, the Company issued
6,311,781 shares of Common Stock, 21,031,733 shares of Series A Preferred Stock
and 32,850 shares of Series B Preferred Stock (Note 12). An additional 5,545
shares of Common Stock, 8,574 shares of Series A Preferred Stock, and 46,368
shares of Series B Preferred Stock were issued during fiscal year 1995 to
TakeCare shareholders for shares which were not presented at the acquisition
date. During fiscal year 1996, the Company redeemed all issued and outstanding
Series B Preferred Stock for $1,980,000 at $25 per share plus accrued and unpaid
dividends through the redemption date.
Holders of the Series A Preferred Stock are entitled to receive cumulative
cash dividends of 5.0% per annum. Dividends are payable quarterly in arrears
when and if declared by the Company's Board of Directors. On or after the fourth
anniversary of the TakeCare acquisition, the Company may, at its option, redeem
all or part of the outstanding shares of Series A Preferred Stock, at fixed
redemption prices per share plus an amount equal to any accrued and unpaid
dividends. Each share of Series A Preferred Stock is convertible at the option
of the holder into the Company's Common Stock at any time. The conversion price
for the Series A Preferred Stock is $31 per share.
In June 1990, the Board of Directors of the Company declared a dividend of
one common share purchase right (a "Right") for each outstanding share of Common
Stock to the holders of record on June 29, 1990, and authorized and directed the
issuance of one Right with respect to each share of Common Stock that shall
become outstanding prior to the occurrence of certain terminating events. Each
Right entitles the registered holder to purchase from the Company one-fourth of
a share of Common Stock at a price which varies based on the market price of a
share of the Company's stock ($27.375 at June 30, 1996), subject to adjustment
(the "Purchase Price"). Upon the occurrence of certain events associated with an
unsolicited takeover attempt of the Company, the Rights will become exercisable
and will cease to automatically trade with the Common Stock. Thereafter, upon
the occurrence of certain further triggering events, each Right will become
exercisable, at an adjusted Purchase Price (the "Adjusted Purchase Price") equal
to four times the Purchase Price immediately prior to such adjustment, for that
number of shares of Common Stock having a market value of two times such
Adjusted Purchase Price. The Rights have certain anti-takeover effects that will
cause
F-24
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
substantial dilution to a person or group that attempts to acquire the Company
in a manner which causes the Rights to become exercisable. The terms of the
Rights may be amended by the Board of Directors of the Company without the
consent of the holders of the Rights. At June 30, 1996, there was one Right
outstanding for each share of Common Stock outstanding and a sufficient number
of authorized but unissued shares of Common Stock available for issuance upon:
(i) the exercise of the Rights; (ii) the issuance of Common Stock (and
associated Rights) in connection with the future exercise of outstanding stock
options; and (iii) the issuance of Common Stock (and associated Rights) in
connection with the future conversion of the Series A Preferred Stock. The
Rights will be cancelled on or before consummation of the Merger Agreement with
PacifiCare (Note 14).
NOTE 11--EARNINGS PER SHARE ATTRIBUTABLE TO COMMON STOCK
Earnings per share for fiscal years 1996, 1995 and 1994 were computed by
dividing net income attributable to Common Stock by 41,524,000, 41,057,000 and
34,051,000 shares, respectively, which represent the weighted average number of
outstanding common shares and common share equivalents during the respective
periods. Common share equivalents include the effect of dilutive stock options
calculated using the treasury stock method.
Primary and fully diluted earnings per share are the same for each year
presented.
F-25
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--ACQUISITION OF TAKECARE
The Company acquired all of the outstanding Common Stock of TakeCare on June
17, 1994, for a combination of stock and cash in a transaction treated as a
purchase for accounting purposes. The consolidated financial statements include
the operations of TakeCare beginning June 17, 1994. The purchase price was
approximately $1,054.4 million, net of acquisition costs (Note 10). As a result
of the purchase, the Company recorded goodwill of approximately $1,078.0
million.
NOTE 13--RESTRUCTURING CHARGE
In June 1995, the Company's Board of Directors approved a restructuring plan
involving the discontinuance of services and programs that did not meet the
Company's strategic and economic return objectives, a reduction in workforce,
and the creation of Talbert, which began operations as a subsidiary of the
Company on January 1, 1996. Talbert operates in all of FHP's formerly Company
operated medical facilities in California, Utah, Arizona, New Mexico and Nevada.
In addition, the Board of Directors decided to sell the Company's two acute care
hospitals and other nonproductive real estate. The restructuring plan included a
significant reduction in the Company's workforce, resulting in separation
expenses for displaced employees.
Accordingly, the Company recorded pretax restructuring charges of $9.7
million ($6.0 million, net of tax) and $75.1 million ($46.6 million, net of tax)
in the accompanying Consolidated Statements of Income for the fiscal years ended
June 30, 1996 and 1995, respectively. The charges included the expected costs of
employee separations ($11.5 million), asset write-downs to estimated net
realizable values ($58.9 million), and certain other costs associated with the
Company's restructuring of its operations ($14.4 million). Assets identified as
those to be sold as part of the restructuring were reclassified as assets held
for sale in the accompanying Consolidated Balance Sheets as of June 30, 1996 and
1995. The hospitals and other assets were sold during fiscal year 1996 and the
transactions had no material impact on earnings. The Company has made adequate
provision for matters such as final settlement of purchase price adjustments
related to the sales of the hospitals and other facilities.
The restructuring charges were based on the Company's estimates and were
refined throughout fiscal year 1996. During fiscal year 1996, the restructuring
reserve was increased by the $9.7 million charge described above and decreased
by $10.1 million. There was no significant change in the aggregate in estimates
with respect to accruals previously established.
NOTE 14--SUBSEQUENT EVENT
On August 4, 1996, the Company entered into an Agreement and Plan of
Reorganization, as amended and restated, (the "Merger Agreement"), by and among
the Company and PacifiCare Health Systems, Inc., et. al. ("PacifiCare").
Pursuant to the Merger Agreement, PacifiCare will acquire all of the outstanding
stock of the Company. The transaction is expected to close in January 1997 (the
"Effective Time"). In the Merger Agreement, holders of the Company's Common
Stock will receive consideration through a combination of $17.50 in cash and a
mix of shares of Class A Common Stock and Class B Common Stock of PacifiCare,
plus rights to purchase stock of Talbert. The consideration at the date of the
Merger Agreement equated to $35.00 per share.
The maximum amount of Class A Common Stock of PacifiCare that will be issued
to stockholders of the Company will be 2,350,000 shares. The balance of
PacifiCare stock to be issued to the Company's stockholders will be Class B
Common Stock. Each outstanding share of the Company's Series A Preferred Stock
will be converted into the right to receive either (a) $14.113 in cash and 0.50
shares of PacifiCare Holding Preferred Stock, assuming approval of the proposed
amendment to the Restated
F-26
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Certificate of Incorporation of the Company ("Series A Amendment"), or (b) if
the Series A Amendment is not approved, (1) $25.00 in cash, (2) a mix of cash,
PacifiCare Class A Common and PacifiCare Class B Common determined by a formula
described in the Merger Agreement, or (3) the consideration that would have been
received had the Series A Preferred Stock been converted into Company Common
Stock immediately prior to the Effective Time of the transaction, including
rights to purchase stock of Talbert. At the Effective Time, each share of the
Company's Common and Preferred Stock will have the right to purchase, in the
aggregate, all of the Company's approximate 92% interest in Talbert. The number
of shares to be delivered in the merger is subject to adjustment based on the
price of PacifiCare stock during a twenty day trading period ending prior to the
Company's stockholders' meeting. The Merger Agreement had no effect on the
Company's fiscal year 1996 results.
PacifiCare has received a commitment from a bank to provide financing for
the cash portion of the transaction. The closing of the transaction is subject
to customary closing conditions, including the approval of the stockholders of
the Company and PacifiCare, various regulatory approvals, and passage of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
and is currently expected to occur in early 1997.
NOTE 15--INFORMATION REGARDING THE COMPANY'S OPERATIONS IN DIFFERENT SEGMENTS
The Company offers a wide range of products to achieve its strategic goal of
becoming a sole source provider of health care services. These products have
been separated into three principal segments of business as a result of the
Company's Restructuring Plan: the HMO, Talbert and insurance and related
services. Talbert provides primary health care services to HMO members in
medical and dental centers formerly operated as a part of the Company's staff
model operations. The HMO offers a wide range of related products to consumers
and employers in the direct delivery of managed health care services, either
through contracted health care providers or through medical centers managed by
Talbert. The insurance segment products include traditional indemnity health and
life insurance, workers' compensation, and third party administration of
self-insured employer programs (collectively, the "Insurance Group"). Often, the
products offered by the HMO and insurance segments are sold to the same account;
that is, an employer is able to offer a "dual choice" to its employees of
enrollment in either the HMO or the indemnity product provided through group
health insurance coverage.
F-27
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information regarding the three segments is summarized below:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------
1996 1995 1994
-------------- -------------- --------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
HMO............................................. $ 4,024,589 $ 3,643,572 $ 1,915,964
Talbert (a)..................................... 458,939 534,855 481,553
Insurance Group................................. 103,895 146,387 109,126
Corporate and eliminations...................... (408,139) (415,434) (33,685)
-------------- -------------- --------------
Total revenue..................................... $ 4,179,284 $ 3,909,380 $ 2,472,958
-------------- -------------- --------------
-------------- -------------- --------------
Pretax income (loss):
HMO (b)......................................... $ 199,431 $ 219,899 $ 141,996
Talbert (a)(b).................................. (19,249) (29,363) (16,696)
Insurance Group (b)............................. (9,171) (10,475) 8,076
Corporate....................................... (87,927) (105,982) (50,356)
Interest income, net............................ 15,033 6,107 13,800
-------------- -------------- --------------
Total pretax income............................... $ 98,117 $ 80,186 $ 96,820
-------------- -------------- --------------
-------------- -------------- --------------
Assets:
HMO (c)......................................... $ 1,803,785 $ 1,794,423 $ 1,875,075
Talbert (a)(c).................................. 165,575 128,909 141,049
Insurance Group................................. 156,854 181,909 167,092
Corporate and eliminations...................... (112,335) 210,575 (13,947)
-------------- -------------- --------------
Total assets...................................... $ 2,013,879 $ 2,315,816 $ 2,169,269
-------------- -------------- --------------
-------------- -------------- --------------
Depreciation and amortization:
HMO............................................. $ 46,528 $ 51,486 $ 20,780
Talbert (a)..................................... 12,361 15,790 14,504
Insurance Group................................. 1,410 1,348 1,399
Corporate....................................... 11,444 11,441 8,588
-------------- -------------- --------------
Total depreciation and amortization............... $ 71,743 $ 80,065 $ 45,271
-------------- -------------- --------------
-------------- -------------- --------------
Capital expenditures:
HMO (c)......................................... $ 20,939 $ 35,376 $ 72,509
Talbert (a)(c).................................. 3,489
Insurance Group................................. 759 1,684 3,287
Corporate....................................... 32,930 35,036 10,256
-------------- -------------- --------------
Total capital expenditures........................ $ 58,117 $ 72,096 $ 86,052
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
- ------------------------
(a) Talbert reflects the operation of the physician practice management company
and several medical and dental professional corporations located in Arizona,
California, Nevada, New Mexico and Utah, from January 1, 1996. Information
prior to this date was obtained from the financial records maintained by
subsidiaries of the Company responsible for the Company's equivalent staff
model operations derived on a consistent basis.
(b) Segments include recognition of allocated costs for information services
necessary to support operations.
(c) All capital expenditures for either HMO operations or Talbert's predecessor
staff model operations were attributed to the HMO prior to January 1, 1996.
Talbert has entered into a lease agreement with the HMO for medical and
dental centers and equipment effective January 1, 1996. The segment data
assumes this lease was in effect for all years presented.
F-28
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--UNAUDITED QUARTERLY INFORMATION
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
-------------- -------------- -------------- --------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Year ended June 30, 1996:
Revenue......................................... $ 1,004,633 $ 1,015,746 $ 1,061,395 $ 1,097,510
Operating income (loss) (a)(d)(e)............... 23,932 23,159 (5,709) 41,702
Income (loss) before income taxes (a)(d)(e)..... 26,644 26,359 (1,375) 46,489
Net income (loss) (a)(d)(e)..................... 13,927 13,921 (5,132) 21,437
Primary earnings (loss) per share attributable
to Common Stock (a)(b)(d)(e).................. $0.18 $0.18 $(0.28) $0.35
Year ended June 30, 1995:
Revenue......................................... $ 954,340 $ 954,407 $ 1,001,062 $ 999,571
Operating income (loss) (c)..................... 37,236 38,660 50,960 (52,777)
Income (loss) before income taxes (c)........... 38,371 39,494 52,613 (50,292)
Net income (loss) (c)........................... 20,720 21,327 28,411 (33,166)
Primary earnings (loss) per share attributable
to Common Stock (c)........................... $0.37 $0.36 $0.53 $(0.97)
Fully diluted earnings per share (b)............ $0.36 $0.49
</TABLE>
- ------------------------
(a) The net loss for the third quarter ended March 31, 1996 included an
unfavorable adjustment due to a charge of $28.7 million, net of tax,
relating to the Company's contracts with OPM (Note 9).
(b) Fully diluted earnings per share is not presented if it is anti-dilutive.
(c) The net loss for the fourth quarter ended June 30, 1995 included an
unfavorable net adjustment due to a restructuring charge of approximately
$46.6 million, net of tax, relating primarily to the costs of employee
separations, asset write-downs to estimated net realizable values, and
certain other costs associated with the restructuring of the Company's
operations (Note 13).
(d) Net income for the fourth quarter ended June 30, 1996 included an
unfavorable net adjustment of $5.0 million due to a claim by HCFA for end
stage renal disease reimbursement that the Company had been overpaid for
certain services for the three year period then ended. Also in the fourth
quarter, the Company recorded approximately $5.2 million, net of tax, for
favorable adjustments associated primarily with the collection of additional
revenue from OPM and changes of estimates with respect to certain fiscal
year 1996 compensation and benefit related accruals and reserves for
professional liability claims.
(e) Net income for the first and second quarters of fiscal 1996 included an
unfavorable adjustment due to restructuring charges of approximately $3.6
million, net of tax, and $2.4 million, net of tax, relating primarily to the
cost of employee separations and certain other costs associated with
restructuring of the Company's operations (Note 13).
F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
FHP International Corporation:
We have audited the accompanying consolidated balance sheets of FHP
International Corporation and its subsidiaries as of June 30, 1996 and 1995, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of FHP International Corporation
and its subsidiaries at June 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1996 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Costa Mesa, California
September 4, 1996
F-30
<PAGE>
APPENDIX A
AMENDED AND RESTATED AGREEMENT
AND PLAN OF REORGANIZATION
AMONG
PACIFICARE HEALTH SYSTEMS, INC.
N-T HOLDINGS, INC.
NEPTUNE MERGER CORP.
TREE ACQUISITION CORP.
AND
FHP INTERNATIONAL CORPORATION
---------------------
AS OF NOVEMBER 11, 1996
---------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<C> <S> <C>
ARTICLE 1 DESCRIPTION OF TRANSACTION............................................................. 1
1.1 Mergers................................................................................ 1
1.2 Effect of the Mergers.................................................................. 2
1.3 Closing; Effective Time................................................................ 2
1.4 Certificates of Incorporation and Bylaws; Directors and Officers....................... 2
1.5 Conversion of Shares................................................................... 3
1.6 Closing of the Transfer Books of the Company and PacifiCare............................ 6
1.7 Exchange of Certificates............................................................... 6
1.8 Appraisal Rights....................................................................... 8
1.9 Stock Subject to Conditions............................................................ 8
1.10 Tax Consequences....................................................................... 8
1.11 Accounting Consequences................................................................ 9
1.12 Further Action......................................................................... 9
ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................................... 9
2.1 Organization; Subsidiaries; Capitalization............................................. 9
2.2 SEC Filings; Financial Statements...................................................... 10
2.3 Absence of Certain Changes or Events................................................... 11
2.4 Tax Matters............................................................................ 11
2.5 Contracts.............................................................................. 12
2.6 Employees.............................................................................. 13
2.7 Litigation and Claims; Compliance with Law............................................. 15
2.8 Properties............................................................................. 15
2.9 Disclosure............................................................................. 15
2.10 Transactions with Affiliates........................................................... 16
2.11 Vote Required.......................................................................... 16
2.12 Takeover Provisions Inapplicable....................................................... 16
2.13 Company Action......................................................................... 16
2.14 Fairness Opinion....................................................................... 16
2.15 Financial Advisor...................................................................... 16
2.16 Enforceability......................................................................... 16
2.17 Governmental Consents; No Conflicts.................................................... 17
2.18 Reserves............................................................................... 17
2.19 Audits or Investigations by Governmental Entities...................................... 18
2.20 Environmental Provisions............................................................... 18
2.21 Intellectual Property.................................................................. 19
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PACIFICARE AND HOLDING............................... 19
3.1 Organization; Subsidiaries; Capitalization............................................. 19
3.2 SEC Filings; Financial Statements...................................................... 21
3.3 Absence of Certain Changes or Events................................................... 21
3.4 Tax Matters............................................................................ 21
3.5 Contracts.............................................................................. 22
3.6 Employees.............................................................................. 23
3.7 Litigation and Claims; Compliance with Law............................................. 24
3.8 Properties............................................................................. 24
3.9 Disclosure............................................................................. 24
3.10 Transactions with Affiliates........................................................... 25
3.11 Vote Required.......................................................................... 25
3.12 Takeover Provisions Inapplicable....................................................... 25
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
3.13 PacifiCare Action...................................................................... 25
<C> <S> <C>
3.14 Actions by Holding, Neptune Sub and Company Sub........................................ 25
3.15 Fairness Opinion....................................................................... 25
3.16 Financial Advisor...................................................................... 25
3.17 Enforceability......................................................................... 26
3.18 Governmental Consents; No Conflicts.................................................... 26
3.19 Common and Preferred Stock To Be Issued................................................ 26
3.20 Reserves............................................................................... 26
3.21 Audits or Investigations by Governmental Entities...................................... 27
3.22 Environmental Provisions............................................................... 27
3.23 Intellectual Property.................................................................. 28
3.24 Formation of Holding................................................................... 28
ARTICLE 4 CONDUCT AND TRANSACTIONS PRIOR TO EFFECTIVE TIME; 28
ADDITIONAL AGREEMENTS.................................................................
4.1 Information and Access................................................................. 28
4.2 Conduct of Business of the Company..................................................... 29
4.3 Conduct of Business of PacifiCare...................................................... 31
4.4 Negotiation With Others................................................................ 32
4.5 Registration Statement; Prospectus/Proxy Statement..................................... 32
4.6 Stockholders' Meetings................................................................. 33
4.7 Regulatory Approvals................................................................... 34
4.8 Employee Benefits Plans................................................................ 34
4.9 Indemnification........................................................................ 37
4.10 Additional Agreements.................................................................. 38
4.11 Disclosure............................................................................. 39
4.12 Affiliate Agreements................................................................... 39
4.13 Tax Qualification and Opinion Back-Up Certificates..................................... 39
4.14 Financing.............................................................................. 39
4.15 Talbert................................................................................ 39
4.16 7% Senior Notes Due 2003............................................................... 40
4.17 Notices of Certain Events.............................................................. 40
4.18 Certain Corporate Matters with Respect to PacifiCare................................... 40
4.19 Compliance with Regulations............................................................ 40
4.20 Assumption by Successor................................................................ 41
4.21 No Activity by Holding................................................................. 41
ARTICLE 5 CONDITIONS PRECEDENT TO OBLIGATIONS OF PACIFICARE AND HOLDING.......................... 41
5.1 Representations and Warranties Accurate................................................ 41
5.2 Compliance With Covenants.............................................................. 41
5.3 No Material Adverse Effect............................................................. 41
5.4 Certificate............................................................................ 41
5.5 Effectiveness of Registration Statement................................................ 41
5.6 Stockholder Approval................................................................... 41
5.7 Affiliates Agreements.................................................................. 41
5.8 Legal Opinion.......................................................................... 42
5.9 Tax Opinion............................................................................ 42
5.10 Absence of Restraint................................................................... 42
5.11 No Governmental Litigation............................................................. 42
5.12 No Other Litigation.................................................................... 42
5.13 HSR Act................................................................................ 42
5.14 Quotation on Nasdaq National Market or New York Stock Exchange......................... 42
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
5.15 Other Required Consents and Approvals.................................................. 42
<C> <S> <C>
5.16 TakeCare Board Representation.......................................................... 42
5.17 Restated Rights Plan................................................................... 43
5.18 Talbert................................................................................ 43
ARTICLE 6 CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS...................................... 43
6.1 Representations and Warranties Accurate................................................ 43
6.2 Compliance With Covenants.............................................................. 43
6.3 No Material Adverse Effect............................................................. 43
6.4 Certificate............................................................................ 43
6.5 Effectiveness of Registration Statement................................................ 43
6.6 Stockholder Approval................................................................... 43
6.7 Legal Opinion.......................................................................... 43
6.8 Tax Opinion............................................................................ 43
6.9 Absence of Restraint................................................................... 44
6.10 No Governmental Litigation............................................................. 44
6.11 HSR Act................................................................................ 44
6.12 Quotation on Nasdaq National Market or New York Stock Exchange......................... 44
ARTICLE 7 TERMINATION OF AGREEMENT............................................................... 44
7.1 Termination............................................................................ 44
7.2 Effect of Termination.................................................................. 45
7.3 Fees and Expenses...................................................................... 45
ARTICLE 8 MISCELLANEOUS.......................................................................... 46
8.1 Amendment.............................................................................. 46
8.2 Waiver................................................................................. 47
8.3 No Survival of Representations and Warranties.......................................... 47
8.4 Entire Agreement; Counterparts; Applicable Law......................................... 47
8.5 Attorneys' Fees........................................................................ 47
8.6 Assignability.......................................................................... 47
8.7 Notices................................................................................ 47
8.8 Cooperation............................................................................ 50
8.9 Certain Terms.......................................................................... 50
8.10 Titles................................................................................. 50
8.11 Articles, Sections and Exhibits........................................................ 50
8.12 Jurisdiction........................................................................... 50
8.13 Counterparts; Effectiveness............................................................ 50
8.14 Schedules.............................................................................. 50
</TABLE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit 1.4 Holding Restated Certificate of Incorporation
Exhibit 4.12 Affiliate Agreements*
</TABLE>
- ------------------------
* Not included as part of this Appendix A.
iii
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION (this
"Agreement") is made and entered into as of November 11, 1996, by and among: N-T
HOLDINGS, INC., a Delaware corporation ("Holding"), PACIFICARE HEALTH SYSTEMS,
INC., a Delaware corporation ("PacifiCare"); NEPTUNE MERGER CORP., a Delaware
corporation and a wholly-owned subsidiary of Holding ("Neptune Sub"); FHP
INTERNATIONAL CORPORATION, a Delaware corporation (the "Company"), and TREE
ACQUISITION CORP., a Delaware corporation and a wholly-owned subsidiary of
Holding ("Company Sub") who hereby amend and entirely restate the Agreement and
Plan of Reorganization among the same parties dated as of August 4, 1996 (the
"Original Agreement") as amended and restated on September 17, 1996 (the "First
Amended Reorganization Agreement").
RECITALS
A. The parties intend concurrently to effect a merger of Neptune Sub into
PacifiCare (the "PacifiCare Merger") and a merger of Company Sub into Company
(the "Company Merger"), each such merger to be carried out in accordance with
this Agreement and the laws of the State of Delaware (the "Mergers"), such that
PacifiCare and Company become wholly-owned subsidiaries of Holding and the
shareholders of PacifiCare and Company become shareholders of Holding. After the
Closing, Holding will act as a holding company for PacifiCare and the Company.
B. This Agreement has been approved by the respective Boards of Directors
of Holding, PacifiCare, Neptune Sub, Company and Company Sub.
C. For United States federal income tax purposes, it is intended that the
transactions contemplated by this Agreement qualify as transfers subject to
Section 351(a) of the Internal Revenue Code of 1986, as amended, and the rules
and regulations promulgated thereunder (the "Code") and that the shareholders of
the Company be treated as if they transferred their stock in Company to Holding
in exchange for the Company merger consideration and that the shareholders of
PacifiCare be treated as if they transferred their stock in PacifiCare to
Holding in exchange for the PacifiCare merger consideration.
D. On August 4, 1996 PacifiCare had issued and outstanding approximately
12,370,758 shares of Class A Common Stock, $0.01 par value ("PacifiCare Class A
Common Stock") and 18,812,799 shares of Class B Common Stock, $0.01 par value
("PacifiCare Class B Common Stock"). On August 4, 1996 the Company had issued
and outstanding approximately 40,806,165 shares of Common Stock, $0.05 par value
("Company Common Stock") and approximately 21,030,345 shares of Series A
Cumulative Convertible Preferred Stock, $0.05 par value ("Company Series A
Preferred Stock").
E. Contemporaneously with the execution and delivery of the Original
Agreement, certain stockholders of PacifiCare and of the Company executed Voting
and Non-Disposition Agreements.
AGREEMENT
Holding, PacifiCare, Neptune Sub, the Company, and Company Sub hereby agree
as follows:
ARTICLE 1
DESCRIPTION OF TRANSACTION
1.1 MERGERS. Upon the terms and subject to the conditions set forth in
this Agreement, at the Effective Time (as defined in Section 1.3), Company Sub
shall be merged into the Company and the separate existence of the Company Sub
shall cease. The Company will be the surviving corporation in the Company Merger
(the "Company Surviving Corporation") and its separate corporate existence, with
all its purposes, objects, rights, privileges, powers and franchises shall
continue unaffected by
1
<PAGE>
such merger. Upon the terms and subject to the conditions set forth in this
Agreement, at the Effective Time, Neptune Sub shall be merged into PacifiCare
and the separate existence of Neptune Sub shall cease. PacifiCare shall be the
surviving corporation in PacifiCare Merger ("PacifiCare Surviving Corporation")
and its separate corporate existence, with all its purposes, objects, rights,
privileges, powers and franchises shall continue unaffected by such merger.
Company Sub and Neptune Sub have been formed solely for the purpose of effecting
the Company Merger and the PacifiCare Merger, respectively, and there will be no
other activity in Company Sub and Neptune Sub.
1.2 EFFECT OF THE MERGERS. The Mergers shall have the effects set forth in
this Agreement and in Section 259 of the Delaware General Corporation Law (the
"DGCL").
1.3 CLOSING; EFFECTIVE TIME. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of PacifiCare on the second business day following the date as of which each of
the conditions set forth in Articles 5 and 6 has been fulfilled or waived or on
such other date or at such other place as may be jointly designated by
PacifiCare and the Company (the "Closing Date"). As soon as practicable after
the Closing, properly executed certificates of merger for each Merger conforming
to the requirements of the DGCL and changing the name of Holding to "PacifiCare
Health Systems, Inc." and the name of PacifiCare to "PacifiCare Operations,
Inc." or some other name chosen by PacifiCare, shall be filed with the Delaware
Secretary of State. The Mergers shall become effective at the time said
certificates of merger are filed with the Delaware Secretary of State or at such
later time as may be specified in said certificates of merger (the "Effective
Time").
1.4 CERTIFICATES OF INCORPORATION AND BYLAWS; DIRECTORS AND OFFICERS.
(a) The Certificates of Incorporation of PacifiCare and Company shall be
the Certificates of Incorporation of PacifiCare Surviving Corporation and the
Company Surviving Corporation, respectively, as of the Effective Time.
(b) The Bylaws of PacifiCare and the Company, as in effect immediately
prior to the Effective Time, shall become the Bylaws of PacifiCare Surviving
Corporation and the Company Surviving Corporation, respectively, at the
Effective Time.
(c) The directors of the Company shall resign or be removed concurrently
with the Effective Time.
(d) PacifiCare shall cause Holding to take all necessary corporate action
to amend the Certificate of Incorporation and Bylaws of Holding prior to the
Effective Time to be in substantially the form of the Amended and Restated
Certificate of Incorporation attached hereto as Exhibit 1.4 (the "Holding
Restated Certificate of Incorporation") and the Bylaws of PacifiCare in effect
on the date hereof; PROVIDED, HOWEVER, that if the Series A Required Vote (as
defined in Section 2.11) is not received for the Series A Amendment (as defined
in Section 2.11), PacifiCare shall cause Holding to take all necessary corporate
action to file a Certificate of Designation creating a Series A-1 Preferred
Stock with rights, preferences, privileges and restrictions identical in all
substantial respects to those of the Company Series A Preferred Stock; and,
PROVIDED FURTHER, that the indemnification provisions of the Bylaws of Holding
may be amended to provide additional indemnification rights to the Directors
and/or Officers of Holding. PacifiCare shall cause the Board of Directors of
Holding after the Effective Time to consist of at least ten persons, of which
two individuals shall be designated by the Board of Directors of the Company and
be reasonably satisfactory to the Board of Directors of PacifiCare. The
designation of such new directors by the Board of Directors of the Company, and
the approval of such new directors by the Board of Directors of PacifiCare shall
each occur prior to the Effective Time. Such new directors shall be appointed to
different classes, and they shall commence to serve within 60 days of the
Effective Time and remain as directors until their successors have been duly
elected or until their earlier death, removal or resignation, provided that they
shall be renominated as required to be able to serve a minimum of three years.
If, prior to the end of such period, either of such directors becomes
2
<PAGE>
unable to serve as director, or is no longer qualified to serve as a director,
the remaining director (or his successor) shall select a replacement nominee
(which nominee shall be satisfactory to the Board of Directors of Holding) to be
appointed to serve the remaining term.
1.5 CONVERSION OF SHARES.
(a) At the Effective Time, by virtue of the Company Merger (and without any
action on the part of any stockholder of the Company):
(i) any shares of Company Common Stock or Company Series A Preferred
Stock then held by the Company or any subsidiary of the Company (or held in
the Company's treasury) shall be canceled;
(ii) any shares of Company Common Stock or Company Series A Preferred
Stock then held by PacifiCare, Neptune Sub or any other subsidiary of
PacifiCare shall be canceled;
(iii) except as provided in clauses (i) and (ii) above or as provided in
Section 1.8 with respect to shares as to which appraisal rights have been
exercised and subject to Section 1.5(c) below, each share of Company Common
Stock outstanding immediately prior to the Effective Time shall be converted
into the right to receive:
(A) an amount of Cash equal to $17.50 (the "Common Cash
Consideration"), plus
(B) the Final Class A/Common Share Ratio (as defined in Section
1.5(a)(vi)(D) below) of a share of Holding's Class A Common Stock, $.01
par value, as provided in the Holding Restated Certificate of
Incorporation ("Holding Class A Common Stock"), plus
(C) the Final Class B/Common Share Ratio (as defined in Section
1.5(a)(vi)(E) below) of a share of Holding's Class B Common Stock, $.01
par value, as provided in the Holding Restated Certificate of
Incorporation ("Holding Class B Common Stock");
(D) Talbert Rights as specified in Section 1.5(a)(v) below.
(iv) except as provided in clauses (i) and (ii) above and subject to
Section 1.5(c), each share of Company Series A Preferred Stock outstanding
immediately prior to the Effective Time shall be converted into Talbert
Rights as specified in Section 1.5(a)(v) below and the other consideration
specified in this clause (iv).
If the Series A Required Vote is received for the Series A Amendment, each
share of Series A Preferred Stock shall, in addition to the consideration
described in the first sentence of this Section 1.5(a)(iv), be converted
into (A) an amount of cash equal to $14.113 (the "Series A Cash
Consideration"); and (B) and one-half ( 1/2) share of Holding Series A (as
defined in Section 1.7(a)).
If the Series A Required Vote is not received for the Series A Amendment,
then, in accordance with the Company's Certificate of Incorporation, the
Company shall, on the date of the Effective Time (or as soon thereafter as
practicable and in any event within 5 days thereof), give notice (the
"Conversion Notice") in accordance with the Company's Certificate of
Designation with respect to the Company Series A Preferred Stock (the
"Certificate of Designation") to all holders of Company Series A Preferred
Stock (other than holders making an Irrevocable Election with respect to all
of their Company Series A Preferred Stock as described in the next
paragraph) that a "Change of Control" (as defined in the Certificate of
Designation) has occurred on the date of the Effective Time and that such
holders may exercise certain "Special Conversion Rights," as defined in the
Certificate of Designation, by delivery of written notice of exercise of
such rights, together with certificates representing the Company Series A
Preferred Stock with respect to which such rights are being exercised, duly
endorsed for transfer, until the expiration of 55 days from the date of the
Conversion Notice. Such Conversion Notice shall also include such other
information as may be required by the Certificate of Designation. In
accordance with the Certificate of Designation, each holder of Company
Series A Preferred Stock receiving the Conversion Notice shall be entitled,
upon exercise of such Special Conversion Rights, to convert each share of
3
<PAGE>
Company Series A Preferred Stock as to which an Irrevocable Election has not
validly been made into either (A) the consideration to be received by a
holder of a single share of Company Common Stock pursuant to Section
1.5(a)(iii) times a fraction, the numerator of which is $25.00 and the
denominator of which is equal to the closing price of the Company Common
Stock on the last business day prior to the date the Company gives the
Conversion Notice to the holders of the Company Series A Preferred Stock or
(B) $25.00 cash plus any accrued but unpaid dividends on such share;
PROVIDED, HOWEVER, that if any holder elects the option specified in clause
(A) above, Holding (directly or through the Company Surviving Corporation)
may, at its option, elect to pay such holder $25.00 cash plus any accrued
but unpaid dividends on such share instead of the consideration set forth in
said clause (A). The Conversion Notice shall also provide that the holders
of Company Series A Preferred Stock may elect to waive their Special
Conversion Rights and elect to receive the same consideration in the Company
Merger that such holder would have received if such holder had converted
such holder's shares of Company Series A Preferred Stock into Company Common
Stock pursuant to such holder's regular conversion rights immediately prior
to the Effective Time ("As-If-Converted Company Merger Consideration"). If
any holder of Company Series A Preferred Stock entitled to receive a
Conversion Notice fails to exercise such holder's Special Conversion Rights
or to waive such rights and elect to receive As-If-Converted Company Merger
Consideration within the time period specified in this Section 1.5(a)(iv)
and the Certificate of Designation, such holder shall thereafter with
respect to all shares of Company Series A Preferred Stock as to which a
valid Irrevocable Election has not been made have only the right to
surrender such shares in accordance with the provisions of Section 1.7 and
to receive for each share the As-If-Converted Company Merger Consideration.
Each holder of Company Series A Preferred Stock shall be given the right,
exercisable prior to the date of the Company Stockholder Meeting, to make an
irrevocable election (the "Irrevocable Election") to waive such holder's
Special Conversion Rights and such holder's right to receive As-If-Converted
Company Merger Consideration in accordance with the foregoing paragraph and
the Certificate of Designation and to instead receive, in lieu thereof, for
each share of Company Series A Preferred Stock as to which the Irrevocable
Election is made (A) the Series A Cash Consideration and (B) one-half ( 1/2)
share of Holding Series A (as defined in Section 1.7(a)). The Irrevocable
Election shall be effected by returning a Form of Irrevocable Election,
properly executed, together with stock certificates representing the Company
Series A Preferred held by the holder as to which the Irrevocable Election
is made (or a properly completed guarantee of delivery) to the Company's
transfer agent prior to the date of the Company Meeting. By making an
Irrevocable Election, the holder will irrevocably waive such holder's right
with respect to all shares as to which the Irrevocable Election is made to
(A) exercise Special Conversion Rights (as provided in the Certificate of
Designation); (B) exercise such holder's right to receive As-If-Converted
Company Merger Consideration; (C) exercise such holder's right to convert
such Company Series A Preferred Stock to Company Common Stock or; (D) gift,
sell, hypothecate or in any other manner transfer such Company Series A
Preferred Stock to any person who does not expressly accept such stock
subject to such Irrevocable Election and agree to be bound thereby; PROVIDED
that the restrictions imposed by such Irrevocable Election shall lapse if
this Agreement shall terminate in accordance with its terms prior to the
Effective Time.
If the Series A Required Vote is not received for the Series A Amendment,
then each share of Series A Preferred Stock as to which a valid Irrevocable
Election has been made shall, in addition to the consideration described in
the first sentence of this Section 1.5(a)(iv), be converted into the Series
A Cash Consideration and one-half ( 1/2) share of Holding Series A.
(v) Subject to Section 1.8 and subject to completion of the transactions
contemplated by Section 4.15, at the Effective Time, by virtue of the
Company Merger (and without any action on the part of any stockholder of the
Company) each share of Company Common Stock and Company Series A Preferred
Stock outstanding immediately prior to the Effective Time shall be converted
in part into rights to purchase directly or indirectly through one or more
other corporations
4
<PAGE>
formed to facilitate such purchase, all of the Company's interest in Talbert
Medical Management Corporation and Talbert Health Services Corporation
(collectively, "Talbert") pro rata based on the number of then outstanding
shares of Company Common Stock and the number of shares of Company Common
Stock into which outstanding shares of Company Series A Preferred Stock are
convertible immediately prior to the Effective Time.
(vi) for purposes of this Agreement:
(A) the "Average Pre-Vote Closing Share Price" for the PacifiCare
Class B Common Stock shall be the average closing price as quoted in the
Wall Street Journal of PacifiCare's Class B Common Stock ("PacifiCare
Class B Common Stock") during the twenty trading days ending on the
trading date immediately prior to the date of the stockholder meeting at
which the Company's stockholders vote on whether to approve the Company
Merger,
(B) the "Initial Exchange Ratio" shall be .258,
(C) the "Closing Price/Signing Price Ratio" shall be the Average
Pre-Vote Closing Share Price for PacifiCare Class B Common Stock divided
by $68.00,
(D) the "Final Class A/Common Share Ratio" shall be 2,350,000
divided by the Common Outstanding Number (as defined in Section
1.5(a)(vi)(G)), calculated to the nearest .001,
(E) the "Final Class B/Common Share Ratio" shall be the Final
Exchange Ratio minus the Final Class A/Common Share Ratio,
(F) the "Final Exchange Ratio" shall be the product of the Initial
Exchange Ratio times the following multiplier, calculated to the nearest
.001:
<TABLE>
<CAPTION>
CLOSING PRICE/SIGNING PRICE
MULTIPLIER RATIO
- ------------------------------------------------- ------------------------------
<S> <C>
0.8875 above 1.30
One minus ( 1/2 times (the Closing
Price/Signing Price Ratio less 1.075)) 1.075- 1.30
1 .925- 1.075
One plus ( 1/2 times (0.925 less the Closing
Price/Signing Price Ratio)) .70- .925
1.1125 less than .70
</TABLE>
(G) The "Common Outstanding Number" shall be the number of shares of
Company Common Stock issued and outstanding immediately before the
Effective Time plus the number of shares of Company Common Stock subject
to Company Options (as defined below), if any, which at the Effective
Time have the right to receive, upon exercise, the consideration set
forth in Section 1.5(a)(iii) after the Effective Time; PROVIDED, HOWEVER,
that if the Series A Required Vote is not received for the Series A
Amendment, then the "Common Outstanding Number" shall also include the
number of shares of Company Common Stock into which the Company Series A
Preferred Stock outstanding immediately prior to the Effective Time could
be converted, excluding those shares as to which a valid Irrevocable
Election has been made.
(vii) each share of the Common Stock, par value $.01 per share, of
Company Sub outstanding shall be converted into an equal number of shares of
Company Common Stock.
(b) At the Effective Time, by virtue of the PacifiCare Merger (and without
any action on the part of any stockholder of PacifiCare):
(i) any shares of PacifiCare Class A Common Stock or PacifiCare Class B
Common Stock (PacifiCare Class A Common Stock and PacifiCare Class B Common
Stock being sometimes
5
<PAGE>
collectively referred to herein as "PacifiCare Common Stock") then held by
PacifiCare or any subsidiary of PacifiCare (or held in PacifiCare's
treasury) shall be canceled and no payment shall be made with respect
thereto;
(ii) any shares of PacifiCare Common Stock then held by the Company,
Company Sub or any other subsidiary of the Company shall be canceled;
(iii) except as provided in clauses (i) and (ii) above and subject to
Section 1.5(c) below, each share of PacifiCare Class A Common Stock then
outstanding shall be converted into the right to receive one share of
Holding Class A Common Stock and each share of PacifiCare Class B Common
Stock then outstanding shall be converted into the right to receive one
share of Holding Class B Common Stock (Holding Class A Common Stock and
Holding Class B Common Stock being sometimes collectively referred to herein
as "Holding Common Stock");
(iv) each share of Common Stock, par value $.001 per share, of Neptune
Sub then outstanding shall be converted into one share of PacifiCare Class A
Common Stock; and
(v) each share of the capital stock of Holding existing immediately
prior to the Effective Time shall be canceled.
(c) If, between the date of this Agreement and the Effective Time, the
outstanding shares of Company Common Stock or Company Series A Preferred Stock
or PacifiCare Class A Common Stock or PacifiCare Class B Common Stock are
changed into a different number or class of shares by reason of any stock
dividend, subdivision, reclassification, recapitalization, split-up, combination
or similar transaction, the exchange ratio applicable thereto shall be
appropriately adjusted.
1.6 CLOSING OF THE TRANSFER BOOKS OF THE COMPANY AND PACIFICARE. At the
Effective Time, holders of certificates representing shares of Company Common
Stock, Company Series A Preferred Stock, PacifiCare Class A Common Stock and
PacifiCare Class B Common Stock shall cease to have any rights as stockholders
of the Company or PacifiCare, respectively, and the stock transfer books of the
Company and PacifiCare shall be closed with respect to all shares of Company
Common Stock, Company Series A Preferred Stock, PacifiCare Class A Common Stock
and PacifiCare Class B Common Stock outstanding immediately prior to the
Effective Time. No further transfer of any such shares of Company Common Stock,
Company Series A Preferred Stock, PacifiCare Class A Common Stock or PacifiCare
Class B Common Stock shall thereafter be made on such stock transfer books. If,
after the Effective Time, a valid certificate previously representing any of
such shares of Company Common Stock, Company Series A Preferred Stock,
PacifiCare Class A Common Stock or PacifiCare Class B Common Stock (an "Old
Stock Certificate") is presented to the Exchange Agent (as defined in Section
1.7) or to the Company or PacifiCare, as applicable, such Old Stock Certificate
shall be canceled and exchanged as provided in Section 1.7.
1.7 EXCHANGE OF CERTIFICATES.
(a) If the Series A Required Vote is received for the Series A Amendment or
if any holder makes an Irrevocable Election, the Holding Restated Certificate of
Incorporation shall establish the terms of Holding's preferred stock, including
the Series A Preferred Stock (the "Holding Series A"). Such Holding Restated
Certificate of Incorporation shall be substantially in the form of Exhibit 1.4
hereto and shall be filed with the Secretary of State of the State of Delaware
prior to the Effective Time. The Holding Series A shall be convertible into
Holding Class B Common Stock upon the terms and conditions, and shall have the
rights, preferences and privileges, set forth in Exhibit 1.4.
(b) Prior to the Closing Date, PacifiCare shall select a reputable bank or
trust company to act as exchange agent in the Merger (the "Exchange Agent").
Promptly after the Effective Time, (i) Holding shall deposit with the Exchange
Agent certificates representing the shares of Holding Class A Common Stock,
Holding Class B Common Stock and Holding Series A, if any, issuable pursuant to
Section 1.5 and (ii) Holding shall deposit cash sufficient to make the payments
called for in Section 1.5 and payments in lieu of fractional shares in
accordance with Section 1.7(e). The shares of Holding Class A
6
<PAGE>
Common Stock, Holding Class B Common Stock and Holding Series A, if any, and
cash amounts so deposited with the Exchange Agent, together with any dividends
or distributions received by the Exchange Agent with respect to such shares, are
referred to collectively as the "Exchange Fund."
(c) As soon as practicable after the Effective Time, the Exchange Agent
will mail to the holders of Old Stock Certificates (i) a letter of transmittal
in customary form and containing such provisions as Holding or PacifiCare may
reasonably specify and (ii) instructions for use in effecting the surrender of
Old Stock Certificates in exchange for the consideration set forth in Section
1.5. If the Series A Required Vote is not received for the Series A Amendment,
the Exchange Agent may (i) delay mailing the letter of transmittal for holders
of Company Series A Preferred Stock who have not made a valid Irrevocable
Election until after expiration of the period during which Special Conversion
Rights may be exercised or (ii) include the letter of transmittal with the
Conversion Notice. Upon surrender of an Old Stock Certificate to the Exchange
Agent for exchange, together with a duly executed letter of transmittal and such
other documents as may be reasonably required by the Exchange Agent, the holder
of such Old Stock Certificate shall be entitled to receive in exchange therefor
(i) in the case of holders of Company Common Stock, (A) a check in the amount
calculated pursuant to this Article 1 (subject to required tax withholding) and
(B) certificates representing the number of whole shares of Holding Class A
Common Stock and Holding Class B Common Stock that such holder has the right to
receive pursuant to the provisions of this Article 1; (ii) in the case of
holders of Company Series A Preferred Stock if the Series A Required Vote is
received for the Series A Amendment and as to holders who have made a valid
Irrevocable Election with respect to the shares represented by such Old Stock
Certificate. (A) a check in the amount calculated pursuant to this Article 1
(subject to required tax withholding), and (B) a certificate representing the
whole number of shares of Holding Series A that such holder has the right to
receive pursuant to the provisions of this Article 1; (iii) in the case of
holders of Company Series A Preferred Stock if the Series A Required Vote for
the Series A Amendment is not received and a valid Irrevocable Election has not
been made with respect to such Company Series A Preferred Stock, (A) if Special
Conversion Rights are exercised, the consideration which such holder is entitled
to receive upon exercise thereof (subject to required tax withholding) or (B)
the As-If-Converted Company Merger Consideration (subject to required tax
withholding); and (iv) in the case of holders of PacifiCare Class A Common Stock
and PacifiCare Class B Common Stock, certificates representing the number of
whole shares of Holding Series A and Holding Series B Common Stock that such
holder has the right to receive pursuant to the provisions of Section 1.5. In
each case, the Old Stock Certificate so surrendered shall be canceled. Until
surrendered as contemplated by this Section 1.7 or by Section 1.5(a)(iv), each
Old Stock Certificate shall be deemed, from and after the Effective Time to
represent only the right to receive upon such surrender the consideration
contemplated by Section 1.5.
(d) No dividends or other distributions declared or made with respect to
Holding Class A Common Stock, Holding Class B Common Stock or, if applicable,
Holding Series A, with a record date after the Effective Time shall be paid to
the holder of any unsurrendered Old Stock Certificate with respect to the shares
of Holding Class A Common Stock, Holding Class B Common Stock and Holding Series
A represented thereby, and no cash payment shall be paid to any such holder,
until such holder surrenders such Old Stock Certificate in accordance with this
Section 1.7 (at which time such holder shall be entitled to receive all such
dividends and distributions and such cash payment).
(e) No certificates or scrip for fractional shares of Holding Class A
Common Stock, Holding Class B Common Stock or, if applicable, Holding Series A
shall be issued, but in lieu thereof, each holder of shares of Company Common
Stock or Company Series A Preferred Stock who would otherwise be entitled to
receive a certificate or scrip for a fraction of a share of Holding Class A
Common Stock, Holding Class B Common Stock or Holding Series A shall receive
from Holding a cash amount equal to the market value of one share of Holding
Class A Common Stock, Holding Class B Common Stock or Holding Series A, as the
case may be, (based on the closing sales price of one share of Holding Class A
Common Stock, Holding Class B Common Stock or Holding Series A as quoted on the
Nasdaq National Market or the New York Stock Exchange ("NYSE"), as the case may
be, on the first
7
<PAGE>
trading day after the Mergers become effective) multiplied by the fraction of a
share of Holding Class A Common Stock, Holding Class B Common Stock or Holding
Series A to which such holder would otherwise be entitled.
(f) Any portion of the Exchange Fund that remains undistributed to former
stockholders of the Company or PacifiCare as of the date 365 days after the date
on which the Mergers become effective shall be delivered to Holding upon demand,
and any former stockholders of the Company or PacifiCare who have not
theretofore surrendered their Old Stock Certificates in accordance with this
Section 1.7 shall thereafter look only to Holding for payment of their claims
for cash, Holding Class A Common Stock, Holding Class B Common Stock, Holding
Series A and any dividends or distributions with respect thereto.
(g) Neither PacifiCare nor the Company shall be liable to any holder or
former holder of shares of Company Common Stock, PacifiCare Common Stock or
Company Series A Preferred Stock with respect to any shares (or dividends or
distributions with respect thereto) or cash amounts from the Exchange Fund
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
1.8 APPRAISAL RIGHTS. Notwithstanding Section 1.5 above, shares of stock
of the Company or PacifiCare outstanding immediately prior to the Effective Time
and held by a holder who has not voted in favor of the Company Merger or the
PacifiCare Merger, as applicable, and who has exercised appraisal rights in
respect of such shares of the Company or PacifiCare in accordance with the DGCL,
shall not be converted into a right to receive shares or cash or other
consideration otherwise available to such holder (including without limitation
the Talbert Rights) unless such holder fails to perfect or withdraws or
otherwise loses his appraisal rights prior to the Effective Time. Shares of
Company's and PacifiCare's stock in respect of which appraisal rights have been
exercised shall be treated in accordance with Section 262 of the DGCL. If after
the Effective Time such holder fails to perfect or withdraws or otherwise loses
his right to demand payment of the fair value of his shares under the DGCL, such
shares shall be treated as if they had been converted as of the Effective Time
into a right to receive the shares and consideration such holder would have
received if such holder had not exercised his appraisal rights; provided,
however, that, such shares shall not be entitled to a distribution of any
Talbert Rights as provided in Section 4.15, but shall be entitled to receive in
cash the amount equal to the average closing price at which such rights trade on
their first five trading days. The Company shall give PacifiCare prompt notice
of any demands received by the Company for the exercise of appraisal rights with
respect to shares of the Company's Common Stock or the Company's Series A
Preferred Stock and PacifiCare shall have the right to participate in all
negotiation and proceedings with respect to such demands. The Company shall not,
except with the prior written consent of PacifiCare, make any payment with
respect to, or settle or offer to settle, any such demands.
1.9 STOCK SUBJECT TO CONDITIONS. If any shares of Company Common Stock or
PacifiCare Common Stock outstanding immediately prior to the Effective Time are
unvested or are subject to a repurchase option, risk of forfeiture or other
condition under any applicable stock purchase agreement, restriction agreement
or other agreement with the Company or PacifiCare, then (unless such condition
terminates by virtue of the applicable Merger pursuant to the express terms of
such agreement) the shares of Holding Common Stock issued in exchange for such
shares of Company Common Stock or PacifiCare Common Stock, as the case may be,
will also be unvested or subject to the same repurchase option, risk of
forfeiture or other condition, and the certificates evidencing such shares of
Holding Common Stock may accordingly be marked with appropriate legends.
1.10 TAX CONSEQUENCES. For federal income tax purposes, the Mergers are
intended to constitute contributions of property in exchange for stock within
the meaning of Section 351(a) of the Code. Neither the Company nor PacifiCare
shall take a position inconsistent with this Section 1.10 on any tax return.
8
<PAGE>
1.11 ACCOUNTING CONSEQUENCES. For accounting purposes, the Company Merger
is intended to be treated as a "purchase."
1.12 FURTHER ACTION. If at any time after the Effective Time any further
action is determined by Holding to be necessary or desirable to carry out the
purposes of this Agreement or to vest the Company Surviving Corporation or
PacifiCare Surviving Corporation with the full right, title and possession of
and to all assets, property, rights, privileges, immunities, powers and
franchises of Company Sub and the Company or of Neptune Sub and PacifiCare,
respectively, the officers and directors of the applicable Surviving Corporation
shall be fully authorized (in the name of Company Sub, in the name of the
Company, in the name of Neptune Sub, or in the name of PacifiCare and otherwise)
to take such action.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the disclosure schedule delivered to PacifiCare on
the date of the Original Agreement and signed by the President of the Company
(the "Company Disclosure Schedule"), the Company represents and warrants to
PacifiCare and Holding, as of the date of the Original Agreement (except to the
extent set forth in Section 5.1(b)) as follows:
2.1 ORGANIZATION; SUBSIDIARIES; CAPITALIZATION.
(a) The Company is a corporation duly organized, existing and in good
standing under the laws of the State of Delaware. The Company has all necessary
power and authority under applicable corporate law and its organizational
documents to own or lease its properties and to carry on its business as
presently conducted. As of the date of the Original Agreement, the Company
Disclosure Schedule sets forth a list of all of the Company's subsidiaries. For
purposes of this Agreement, a company's "subsidiaries" shall include all
corporations, limited partnerships, joint ventures and other entities in which
such company, directly or indirectly, owns a majority interest.
(b) Each of the Company and its subsidiaries, to the extent conducting
business as a health maintenance organization ("HMO"), insurance company,
third-party administrator or otherwise requiring any form of governmental
licensure, qualification or authorization, is duly licensed, qualified or
authorized and in good standing under the applicable laws and regulations,
respectively, of each state or territory in which the conduct of such business
requires such licensure, qualification or authorization, except where failure
would not have a material adverse effect on the Company or its material
subsidiaries as set forth in Schedule 2.1(b) (the "Company's Material
Subsidiaries"). The conduct of the Company's and its subsidiaries' respective
business is in conformity with all applicable foreign, federal, state or
territorial, local and other governmental and regulatory requirements and the
forms, procedures and practices of the Company and its subsidiaries in the
conduct of their respective business are also in compliance with all such
requirements, to the extent applicable, except where nonconformity or
noncompliance would not constitute a Material Adverse Effect on the Company. For
purposes of this Agreement, "Material Adverse Effect," as it applies to the
Company, means a material adverse effect on the business, operations, financial
condition or assets of the Company and its subsidiaries, taken as a whole, other
than as a result of the performance by the Company of its obligations, or the
exercise by Holding, PacifiCare and Neptune Sub of their rights, under this
Agreement.
(c) As of the date of the Original Agreement, the authorized capital stock
of the Company consisted of: 100,000,000 shares of Company Common Stock, par
value $0.05 per share, of which, as of the date of the Original Agreement,
40,806,165 shares were issued and outstanding; and 40,000,000 shares of
preferred stock, par value $0.05 per share, of which, as of the date of the
Original Agreement, 21,030,345 shares of Company Series A Preferred Stock were
issued and outstanding. All the issued and outstanding shares of Company Common
Stock and Company Series A Preferred Stock are validly issued, fully paid and
nonassessable and free of preemptive rights. As of the date of the Original
Agreement, the Company had issued outstanding options to purchase a total of
3,917,259 shares of
9
<PAGE>
Company Common Stock (the "Company Options") pursuant to Company's stock option
plans and agreements. The Company has provided PacifiCare a schedule (the
"Option and Restricted Stock Schedule") which sets forth (i) with respect to the
Company Options, the name of each optionee, the number of shares of Company
Common Stock subject to each Company Option, the date of grant and exercise
price and the vesting schedule of each Company Option, (ii) each option plan and
agreement under which the Company Options have been granted, and the Company has
delivered to PacifiCare complete and accurate copies of all such plans, and
(iii) the name of each holder of restricted stock, the date of sale and issuance
of such restricted stock to each such holder, and the applicable restrictions on
such restricted stock. The Company has an Amended and Restated Rights Agreement
dated as of March 28,1994 between Company and American Stock Transfer & Trust
Co., as agent (the "Restated Rights Agreement") under which certain shareholder
rights have been granted. The execution of Voting and Non-Disposition Agreements
by certain stockholders of the Company has not and will not give rise to any
rights or benefits under the Restated Rights Plan. Except as set forth above or
on the Company Disclosure Schedule, as of the date of the Original Agreement,
(i) there were no shares of capital stock of the Company authorized, issued or
outstanding, (ii) there were no outstanding subscriptions, options, warrants,
stock appreciation right plans, calls, rights, convertible securities,
stockholder rights plans (or similar plans commonly referred to as "poison
pills") or other agreements or commitments of any character relating to issued
or unissued capital stock or other securities of the Company or any of its
subsidiaries, or obligating the Company or any other party to issue, transfer or
sell any shares of the capital stock or other securities of the Company or any
of its subsidiaries, and (iii) there were no other outstanding securities
convertible into, exchangeable for or evidencing the right to subscribe for any
shares of the capital stock or other securities of the Company or any of its
subsidiaries or any successor corporation or controlling person of such
successor corporation. The Company is not under any obligation to register under
the Securities Act any of its presently outstanding securities or any securities
that may be subsequently issued.
(d) Each subsidiary of the Company is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and has all necessary power and authority under applicable
corporate law to own and lease its properties and to carry on its business as
presently conducted. All of the outstanding shares of capital stock of each
subsidiary of the Company are validly issued, fully paid and nonassessable and
are owned beneficially and of record by the Company or another subsidiary of the
Company, free and clear of any liens, claims or encumbrances.
(e) Complete and accurate copies of the Certificate of Incorporation and
Bylaws (or other or comparable charter documents), each as amended to date, of
the Company and each of its subsidiaries are filed as exhibits to the Company
SEC Reports or have been delivered to PacifiCare.
2.2 SEC FILINGS; FINANCIAL STATEMENTS.
(a) The Company has made available to PacifiCare a complete and accurate
copy of each report, schedule, registration statement and definitive proxy
statement filed by the Company with the Securities and Exchange Commission
("SEC") on or after July 1, 1995 (the "Company SEC Reports"), which are all the
forms, reports and documents required to be filed by the Company with the SEC
since July 1, 1995. The Company SEC Reports (i) complied in all material
respects with the requirements of the Securities Act or the Exchange Act (as
such terms are defined in Section 2.17), as the case may be, at and as of the
times they were filed (or, if amended or superseded by a filing prior to the
date of this Agreement, then on the date of such filing) and (ii) did not at and
as of the time they were filed (or, if amended or superseded by a filing prior
to the date of this Agreement, then on the date of such filing) contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading.
(b) Each of the sets of financial statements (including, in each case, any
related notes thereto) contained in the Company SEC Reports and the Company's
estimated balance sheet as of May 31, 1996 (the "May 31, 1996 Balance Sheet"),
as well as the Company's preliminary interim income statement for the fiscal
year ended June 30, 1996 (the "June 30 Statement") that have been delivered
10
<PAGE>
to PacifiCare (collectively, the "Past Financial Statements") were prepared in
accordance with generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods involved (except as may be indicated in
the notes thereto) and fairly presents the consolidated financial position of
the Company and its subsidiaries as at the respective dates thereof and the
consolidated results of its operations and cash flows for the periods indicated,
except that the May 31, 1996 Balance Sheet and the June 30 Statement included in
the Past Financial Statements (i) were or are subject to normal year-end audit
adjustments which were not or are not expected to be material in amount and (ii)
do not contain footnotes.
(c) The Company and its subsidiaries have no Liabilities, except for (i)
any Liability which is accrued or fully reserved against in the May 31, 1996
Balance Sheet or disclosed in the notes included in the Past Financial
Statements, (ii) any Liability which was incurred after May 31, 1996 in the
ordinary course of business, (iii) other Liabilities which, individually or in
the aggregate, have not had and would not reasonably be expected to have a
Material Adverse Effect on the Company or (iv) any Liability under or disclosed
in this Agreement. As used herein, "Liabilities" shall mean any liability or
obligation of any kind or nature, secured or unsecured (whether absolute,
accrued, contingent or otherwise, and whether due or to become due).
2.3 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since March 31, 1996, there has
not been (a) any change, or any development or combination of changes or
developments that has had or would reasonably be expected to have a Material
Adverse Effect on the Company, (b) any damage, destruction or loss, whether or
not covered by insurance, that has had or would reasonably be expected to have a
Material Adverse Effect on the Company or (c) except as permitted or required in
this Agreement, any transaction, commitment, dispute or other event or condition
(financial or otherwise) of any character (whether or not in the ordinary course
of business) which would be prohibited by Section 4.2(b)(i), (ii), (v), (vi),
(vii), (ix), (xiv), and (xvi) if it were to occur or be effected between the
date of the Original Agreement and the Effective Time.
2.4 TAX MATTERS.
(a) The Company (or, if applicable, one of its subsidiaries) has filed,
within the time (including any extensions of applicable due dates) and in the
manner prescribed by law, all material returns, declaration, reports, estimates,
information returns and statements, including information returns and reports
("Returns"), required to be filed under federal, state or territorial, local or
any foreign laws regarding Taxes (as defined below) by the Company and its
subsidiaries, except for such Returns the failure of which to timely file would
not result in a liability of more than $5,000,000.
(b) The Company (or, if applicable, one of its subsidiaries) has, within
the time (including any extensions of applicable due dates) and in the manner
prescribed by law, paid all Taxes (as defined below) that are due and payable
except Taxes (i) for which adequate reserves have been established under the
Past Financial Statements, (ii) which are being contested in good faith or (iii)
which involve permanent differences in the aggregate less than $5,000,000 or
involve timing differences in the aggregate less than $10,000,000.
(c) The Company and its subsidiaries have not filed (and will not file
prior to the Closing Date) any consent agreement under Section 341(f) of the
Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of
any subsection (f) asset (as such term is defined in Section 341(f)(4) of the
Code) owned by the Company or such subsidiaries.
(d) No outstanding debt obligation of the Company is "corporate acquisition
indebtedness" within the meaning of Section 279(b) of the Code.
(e) There are no claims or assessments in excess of $5,000,000, pending or
threatened, by any taxing authority against the Company or any of its
subsidiaries. The Company Disclosure Schedule lists all pending tax audits by
the IRS, all agreements with the IRS to delay the applicable statute of
limitations and all settlements of any tax audits or claims by the IRS since
July 1, 1993.
11
<PAGE>
(f) For purposes of this Article 2, "Taxes" shall mean all taxes, charges,
fees, levies, or other assessments of whatever kind or nature, including,
without limitation, all net income, gross income, gross receipts, sales, use,
value-added, ad valorem, transfer, franchise, profits, license, withholding,
payroll, employment, excise, estimated, severance, stamp, net worth,
environmental, occupancy or property taxes, fees, assessments or charges of any
kind whatsoever (together with any interest and any penalties, additions to tax
or additional amounts) imposed by any taxing authority (domestic or foreign)
upon or payable by the Company or any of its subsidiaries.
2.5 CONTRACTS.
(a) COMPANY MATERIAL CONTRACTS. For purposes of this Agreement, "Company
Material Contracts" shall mean (i) each contract, agreement or other arrangement
of or involving the Company or any of its subsidiaries with respect to
indebtedness for money borrowed in excess of $3,000,000 (other than trade
payables in the ordinary and usual course of business), including, but not
limited to, letters of credit, guaranties and swap and similar agreements; (ii)
each contract, agreement or other arrangement which limits or restricts the
ability of the Company or any of its subsidiaries to compete or otherwise
conduct its business in any manner or place which materially affects the Company
or any material subsidiary; (iii) each mortgage, contract, license, lease,
indenture or other agreement of the Company or any of its subsidiaries (A) which
would be required by Rule 601(b)(10) of SEC Regulation S-K to be filed as an
exhibit to an Annual Report on Form 10-K (other than any employee benefit plan)
or (B) which constitutes any other liability (including, without limitation, any
guarantee, surety contract or similar instrument), obligation or transaction
and, in the case of any item referred to in this clause, is material to the
Company and its subsidiaries or their businesses or prospects taken as a whole;
and (iv) for each state in which the Company or its subsidiary conducts business
as an HMO, insurance company, third-party administrator or otherwise requiring
licensure as set forth in Section 2.1(b), (A) the material contracts (based on
gross revenues generated thereunder) with government agencies or employer or
other groups, (B) the material contracts (based on payments made thereunder)
with physician providers of health care services, (C) the material contracts
(based on payments made thereunder) with providers of hospital services, and (D)
the material contracts (based on payments made thereunder) with providers of
non-hospital, non-physician medical services, all as specified in the next
sentence. In California, material contracts are the twenty-five largest
government agency or employer or other group contracts, the twenty-five largest
physician provider contracts, the ten largest hospital contracts and the ten
largest non-physician, non-hospital contracts. In Colorado, material contracts
are the five largest hospital contracts and the ten largest physician provider
contracts. In Arizona, material contracts are the five largest hospital
contracts and five largest physician provider contracts. In Utah, material
contracts are the six largest hospital contracts and nine largest physician
provider contracts. In all other states or territories in which the Company or a
subsidiary conducts business, material contracts are the five largest government
agency or employer or other group contracts, the five largest physician provider
contracts and the five largest hospital contracts. The Company will use its best
efforts to provide a true and complete copy of each Company Material Contract to
PacifiCare within 30 days of the date of the Original Agreement.
All Company Material Contracts, are in full force and effect and are binding
upon Company or its subsidiary, as the case may be, and, to the Company's
knowledge, are binding on the other parties thereto, except as enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws, both state and federal, affecting the enforcement of
creditors' rights or remedies in general from time to time in effect and the
exercise by courts of equity powers. To the Company's knowledge, no material
default by the Company or any of its subsidiaries has occurred under any of the
Company Material Contracts and (A) no material default by any of the other
contracting parties has occurred under any of the Company Material Contracts,
(B) no event has occurred which with the giving of notice or the lapse of time,
or both, would constitute a material default by the Company or any of its
subsidiaries or any of the other contracting parties and (C) there is no other
reason, including without limitation any pending or threatened termination, that
any Company Material Contract will terminate (other than expiration in
accordance with its terms).
12
<PAGE>
(b) The Company Disclosure Schedule sets forth a list of all claims other
than invoices in the ordinary course of business, or claims made under risk
programs in the ordinary course of business made or, to the Company's knowledge,
threatened against the Company or any of its subsidiaries under each Company
Material Contract presently or heretofore in effect (including claims for back
charges, rebates, price reductions, breaches of product or service warranties or
for product or service liability for products manufactured or sold), to the
extent such claims have had or would reasonably be expected to have (i) for
provider contracts, a cost to the Company or its Material Subsidiaries in excess
of $5,000,000 or (ii) for other Company Material Contracts, a material adverse
effect on the Company or any of its Material Subsidiaries.
(c) Except as listed on the Company Disclosure Schedule, there are no
contracts, agreements or understandings, oral or written, between the Company or
any of its subsidiaries and Talbert that would interfere or conflict with the
transactions contemplated by Section 4.15 hereof.
2.6 EMPLOYEES.
(a) The Company has made available to PacifiCare a list of the top 100 paid
employees of the Company and its subsidiaries and, to the Company's knowledge,
the information relating to each person on such list is correct. The Company
Disclosure Schedule identifies each "employee benefit plan," as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), currently or previously maintained, contributed to or entered into by
the Company or any ERISA Affiliate (as defined below) under which the Company or
any ERISA Affiliate thereof has any present or future obligation or liability
(collectively, the "Company Employee Plans"). For purposes of this Section 2.6,
"ERISA Affiliate" shall mean any entity which is a member of (A) a "controlled
group of corporations," as defined in Section 414(b) of the Code, (B) a group of
entities under "common control," as defined in Section 414(c) of the Code, or
(C) an "affiliated service group," as defined in Section 414(m) of the Code, or
treasury regulations promulgated under Section 414(o) of the Code, any of which
includes Company. Copies of all Company Employee Plans (and, if applicable,
related trust agreements) and all amendments thereto and written interpretations
thereof (including summary plan descriptions) have been made available to
PacifiCare or its counsel, together with the most recent annual report (Form
5500, including, if applicable, Schedule B thereto) prepared in connection with
any such Company Employee Plan. All Company Employee Plans which individually or
collectively would constitute an "employee pension benefit plan," as defined in
Section 3(2) of ERISA (collectively, the "Company Pension Plans"), are
identified as such in the Company Disclosure Schedule. All material
contributions due from the Company with respect to any of the Company Employee
Plans have been made as required under ERISA or have been accrued on the
Company's financial statements as of March 31, 1996. Each Company Employee Plan
has been maintained substantially in compliance with its terms and with the
requirements prescribed by any and all statutes, orders, rules and regulations,
including, without limitation, ERISA and the Code, which are applicable to such
Company Employee Plans, except as would not have a Material Adverse Effect on
the Company.
(b) No Company Pension Plan constitutes, or has since the enactment of
ERISA constituted, a "multiemployer plan," as defined in Section 3(37) of ERISA.
No Company Pension Plans are subject to Title IV of ERISA. No "prohibited
transaction," as defined in Section 406 of ERISA or Section 4975 of the Code,
has occurred with respect to any Company Employee Plan which is covered by Title
I of ERISA which would have a Material Adverse Effect on the Company, excluding
transactions effected pursuant to a statutory or administrative exemption.
Nothing done or omitted to be done by the Company and no transaction or holding
of any asset under or in connection with any Company Employee Plan has or will
make the Company or any officer or director of the Company subject to any
material liability under Title I of ERISA or liable for any material tax or
penalty pursuant to Sections 4972, 4975, 4976 or 4979 of the Code or Section 502
of ERISA.
(c) With respect to each Company Pension Plan that is intended to be
qualified under Section 401(a) of the Code (a "Company 401(a) Plan"), either (A)
a favorable determination letter has been received from the Internal Revenue
Service ("IRS") as to such qualification under the Code as in effect immediately
after the Tax Reform Act of 1986, (B) an application for a favorable
determination
13
<PAGE>
letter is pending that was duly filed with the IRS prior to the expiration of
the time within which retroactive amendment relating back to the effective date
of such plan may be made under Section 401(b) of the Code and regulations or IRS
pronouncements thereunder, or (C) the time provided under Section 401(b) of the
Code and regulations or IRS pronouncements thereunder for making retroactive
amendments relating back to the effective date of such plan will not expire
before the date that is sixty (60) days after the date of the Original
Agreement, and there is no reason to believe that any favorable determination
letter will not be received.
(d) No Company Employee Plan provides or ever has provided death, medical
or health benefits (whether or not insured) with respect to current or former
employees after any such employee's retirement or other termination of service
(other than (A) benefit coverage mandated by applicable law, including, without
limitation, coverage provided pursuant to Section 4980B of the Code, (B) death
benefits or retirement benefits under any Company Pension Plan, (C) deferred
compensation benefits accrued as liabilities on the books of the Company, or (D)
benefits the full cost of which is borne by the current or former employee (or
the employee's beneficiary)).
(e) The Company Disclosure Schedule lists each material employment,
severance or other similar contract, arrangement or policy and each plan or
arrangement (written or oral) providing for insurance coverage (including any
self-insured arrangements), workers' benefits, vacation benefits, severance
benefits, disability benefits, death benefits, hospitalization benefits,
retirement benefits, deferred compensation, profit-sharing, bonuses, stock
options, stock purchase, phantom stock, stock appreciation or other forms of
incentive compensation or post-retirement insurance, compensation or benefits
for employees, consultants or directors which (A) is not a Company Employee
Plan, (B) is entered into, maintained or contributed to, as the case may be, by
the Company or any subsidiary and (C) covers any employee or former employee of
the Company. Such contracts, plans and arrangements as are described in this
Section 2.6(e) are herein referred to collectively as the "Company Benefit
Arrangements." Each Company Benefit Arrangement has been maintained in
substantial compliance with its terms and with the requirements prescribed by
any and all statutes, orders, rules and regulations which are applicable to such
Company Benefit Arrangement. The Company has delivered to PacifiCare or its
counsel a complete and correct copy or description of each contract, plan or
arrangement that constitutes a Company Benefit Arrangement.
(f) There has been no amendment to, written interpretation or announcement
(whether or not written) by the Company relating to, or change in employee
participation or coverage under, any Company Employee Plan or Company Benefit
Arrangement that would increase materially the expense of maintaining such
Company Employee Plan or Company Benefit Arrangement above the level of the
expense incurred in respect thereof for the year ended June 30, 1996.
(g) The Company has provided, or will have provided prior to the Closing to
individuals entitled thereto all required notices and coverage pursuant to
Section 4980B of the Code and the Consolidated Omnibus Budget Reconciliation Act
of 1985, as amended ("COBRA"), with respect to any "qualifying event" (as
defined in Section 4980B(f)(3) of the Code) occurring prior to and including the
Closing, and no material tax payable on account of Section 4980B of the Code has
been incurred with respect to any current or former employees (or their
beneficiaries) of the Company.
(h) Neither the Company nor any of its subsidiaries is subject to any
collective bargaining agreement with respect to any of its employees, has any
material current labor problems or disputes, and, to its knowledge, has been
subject to any effort to organize any employees during the last 24 months. The
Company has good labor relations and has no knowledge of any facts indicating
that the consummation of the transactions contemplated hereby will have a
material adverse effect on labor relations.
14
<PAGE>
2.7 LITIGATION AND CLAIMS; COMPLIANCE WITH LAW.
(a) Except as set forth in the Company Disclosure Schedule, there is, to
the Company's knowledge, no examination, audit, review, investigation,
arbitration, suit, litigation or other proceeding (a "Proceeding") pending or
threatened by or before any court or Governmental Authority (as defined in
Section 2.17) to which the Company or any of its subsidiaries is a party or
otherwise involved or to which any of the business or assets of the Company or
any of its subsidiaries is subject which has or would reasonably be expected to
have (i) a potential liability in excess of $5,000,000 or (ii) a material
adverse effect on Company, or any Company Material Subsidiary, whether or not
covered by insurance.
(b) Neither the Company nor any of its subsidiaries is a party to any
decree, order or arbitration award (or agreement entered into in any Proceeding)
with respect to its properties, assets, personnel or business activities which
has had or would reasonably be expected (i) to have a potential cost in excess
of $5,000,000, or (ii) to affect materially the operations of the Company or any
Company Material Subsidiary.
(c) Except as set forth on the Company Disclosure Schedule or in Company
SEC Reports or other public filings with the SEC, neither the Company nor any of
its subsidiaries is or has at any time since July 1, 1993 (July 1, 1990 in the
case of any violation involving any Governmental Authority) been in violation
of, or delinquent in respect to, any decree, order or arbitration award or law,
statute or regulation of, or agreement with, or any license or permit from, any
Governmental Authority to which any of its properties, assets, personnel or
business activities are subject or to which any of them is subject, including
laws, rules and regulations relating to the environment, insurance companies,
HMOs, third-party administrators or other businesses required to be licensed
under Section 2.1(b), occupational health and safety, employee benefits, wages,
workplace safety, equal employment opportunity and race, religious, sex and age
discrimination which has had or would reasonably be expected have a Material
Adverse Effect on the Company.
2.8 PROPERTIES.
(a) The Company and its subsidiaries have insurance policies, commercially
adequate to protect against the risks so insured. The Company has made available
copies of all such policies to PacifiCare or its counsel. Neither the Company
nor any of its subsidiaries has done anything by way of action or inaction which
might invalidate any of such policies in whole or in part, except in the
ordinary course of business.
(b) The Company and its subsidiaries own and hold title to all real and
other property reflected in the Company SEC Reports as owned by the Company or
any of its subsidiaries, as the case may be.
2.9 DISCLOSURE.
(a) The copies of all documents furnished by the Company pursuant to the
terms of this Agreement are complete and accurate copies of the originals.
(b) During the past 12 months, the Company has timely filed all required
forms, reports and documents required to be filed with the SEC and the National
Association of Securities Dealers (the "NASD").
(c) None of the information supplied or to be supplied by the Company for
inclusion or incorporation by reference in the registration statement on Form
S-4 to be filed with the SEC by Holding in connection with the issuance of the
Holding Class A Common Stock, Holding Class B Common Stock and Holding Series A
in the Mergers and the votes of the Company's and PacifiCare's stockholders (the
"S-4 Registration Statement") will, at the time the S-4 Registration Statement
is filed with the SEC or at the time the S-4 Registration Statement becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading. None of the information supplied or
to be supplied by the Company for inclusion or incorporation by reference in the
Prospectus/Proxy Statement filed as a part of the S-4
15
<PAGE>
Registration Statement (the "Prospectus/Proxy Statement"), will, at the time
mailed to the stockholders of the Company, at the time of the Company
Stockholders' Meeting (as defined in Section 4.6) and as of the Effective Time,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Prospectus/Proxy Statement will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations promulgated by the SEC thereunder.
2.10 TRANSACTIONS WITH AFFILIATES. Except for compensation of employees,
every transaction between Company and any of its "affiliates" or their
"associates" (as such terms are defined in the rules and regulations of the SEC)
which is currently in effect or was consummated since July 1, 1995, and for
which disclosure is required under Item 404 of Regulation S-K promulgated by the
SEC is set forth in the Company SEC Reports or in the Company Disclosure
Schedule.
2.11 VOTE REQUIRED. The affirmative vote of the holders of a majority of
the outstanding Company Common Stock is necessary to adopt and approve this
Agreement and the Company Merger (the "Company Required Vote"). The affirmative
vote of the holders of a majority of the outstanding Common Stock and of 66 2/3%
of the outstanding Company Series A Preferred Stock (the "Series A Required
Vote") is necessary to adopt and approve an amendment (the "Series A Amendment")
to the Company's Restated and Amended Certificate of Incorporation (the "Company
Restated Certificate of Incorporation") providing for the payments in the first
sentence of Section 1.5(a)(iv) in lieu of those currently required by the
Certificate of Designation.
2.12 TAKEOVER PROVISIONS INAPPLICABLE. As of the date of the Original
Agreement and at all times on or prior to the Effective Date, Section 203 of the
DGCL was, and shall be, inapplicable to the Company Merger.
2.13 COMPANY ACTION. The Board of Directors of the Company (at a meeting
duly called and held) has (a) unanimously determined that the Company Merger and
the Series A Amendment are advisable and fair and in the best interests of the
Company and its stockholders, (b) unanimously approved this Agreement, the
Series A Amendment and the Company Merger in accordance with the provisions of
Sections 242 and 251 of the DGCL, (c) unanimously recommended the adoption and
approval of this Agreement and the Company Merger by the holders of Company
Common Stock and directed that the Company Merger be submitted for consideration
by the Company's stockholders at the Company Stockholders' Meeting, (d) taken
all necessary steps to render Section 203 of the DGCL inapplicable to the
Company Merger, (e) unanimously recommended the adoption and approval of the
Series A Amendment by the holders of Company Common Stock and of Company Series
A Preferred Stock and directed that the Series A Amendment be submitted for
consideration by the Company's stockholders at the Company Stockholders'
Meeting, and (f) taken all necessary steps to ensure that the Company Merger and
related transactions, including, without limitation, the execution of any of the
Voting and Non-Distribution Agreements, will not result in the distribution or
exercisability of any rights under the Restated Rights Agreement.
2.14 FAIRNESS OPINION. The Company has received the written opinion of
Merrill Lynch & Co., financial advisor to the Company, dated August 4, 1996, to
the effect that the consideration to be received by the holders of the Company's
Common Stock is fair to such holders from a financial point of view.
2.15 FINANCIAL ADVISOR. The Company represents and warrants that except
for Merrill Lynch & Co., no broker, finder or investment banker is entitled to
any brokerage, finder's or other fee or commission payable by the Company or its
subsidiaries in connection with the Company Merger, except a fee not to exceed
$400,000 payable with respect to the proposed Talbert separation described in
Section 4.15 below.
2.16 ENFORCEABILITY. The Company has full corporate power and authority to
execute, deliver and perform each of the Transactional Agreements to which it is
or will become a party. The execution
16
<PAGE>
and delivery of said Transactional Agreements have been duly and validly
authorized by the Board of Directors of the Company, and no other corporate
proceedings on the part of the Company are necessary for the Company to
authorize any of the Transactional Agreements, and no such proceedings (other
than the approval of the Company's stockholders) are necessary to enable the
Company to perform or consummate any of the transactions contemplated by this
Agreement. Said Transactional Agreements (a) have been (or will be) duly
executed and delivered by duly authorized officers of the Company and (b)
constitute (or, when executed by the Company, will constitute) legal, valid and
binding obligations of the Company enforceable against it in accordance with
their terms (except as enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws, both state and
federal, affecting the enforcement of creditors' rights or remedies in general
from time to time in effect and the exercise by courts of equity powers). For
purposes of this Article 2, "Transactional Agreements" means this Agreement and
the related Agreement of Merger for the Company Merger.
2.17 GOVERNMENTAL CONSENTS; NO CONFLICTS. Except as may be required by the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Securities
Act of 1933, as amended (the "Securities Act"), state securities or blue sky
laws, the DGCL, the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"HSR Act"), the NASD Bylaws (as they relate to the S-4 Registration Statement
and the Prospectus/Proxy Statement) and laws governing insurance companies,
HMOs, and third-party administrators or other businesses operated by the Company
or its subsidiaries requiring licensure, qualification or authorization, there
is no requirement applicable to the Company or any of its subsidiaries to make
any filing with, or to obtain any permit, authorization, consent or approval of,
any federal, state or territorial, local or foreign governmental or regulatory
agency, department, commission or other authority (a "Governmental Authority"),
except for such filings, permits, authorizations, consents or approvals which,
if not made or obtained, would not have a Material Adverse Effect on the
Company. Neither the execution and delivery of this Agreement by the Company nor
the consummation by the Company of any of the transactions contemplated by this
Agreement will (a) conflict with, violate or result in any breach of any
provision of the Certificate of Incorporation or Bylaws (or comparable charter
documents) of the Company or Talbert, (b) result in a material default (or with
notice or lapse of time or both would result in a default) under, or materially
impair the rights of the Company or any of its subsidiaries or materially alter
the rights or obligations of any third party under, or require the Company or
any of its subsidiaries to make any material payment or become subject to any
material liability to any third party under, or give rise to any right of
termination, amendment, cancellation, acceleration, repurchase, put or call
under, any of the terms, conditions or provisions of any Company Material
Contract, (c) result in the creation of any material (individually or in the
aggregate) liens, charges or encumbrances on any of the material assets of the
Company or any of its subsidiaries or (d) conflict with or violate any law,
statute, rule, regulation, judgment, order, writ, injunction, decree or
arbitration award applicable to the Company or any of its subsidiaries or any of
their material assets, which conflict or violation has had or would reasonably
be expected to have a Material Adverse Effect on the Company.
2.18 RESERVES. The reserves established by the Company and its
subsidiaries in the Company SEC Reports, or in any financial statement or
balance sheet contained in any document filed with the SEC after the date of the
Original Agreement, for statutorily required reserves and for incurred but not
yet paid claims for, or relating to, medical treatment or similar claims (i) are
computed in accordance with presently accepted industry standards consistently
applied, (ii) meet the requirements of any law, rule or regulation applicable to
such reserves, (iii) are computed on the basis of assumptions consistent with
those used in computing the corresponding reserves in the prior fiscal year, and
(iv) include provision for all actuarial reserves and related items which ought
to be established in accordance with applicable laws or regulations and prudent
industry practices. As of the date of the Original Agreement, neither the
Company nor its senior management was aware of any fact or circumstance which
would necessitate, in the good faith application of prudent reserving practices
and policies, any material adverse change in statutorily required reserves or
reserves for such incurred but
17
<PAGE>
not yet paid claims above that reflected in the most recent balance sheet
included in the Company SEC Reports (other than increases consistent with past
experience resulting from increases in enrollment with respect to the Company's
subsidiaries' services).
2.19 AUDITS OR INVESTIGATIONS BY GOVERNMENTAL ENTITIES. As of the date of
the Original Agreement, other than as disclosed in the Company Disclosure
Schedule, no audit or investigation of the Company or any of its subsidiaries
which may be expected to have a Material Adverse Effect on the Company was
pending before, or to the Company's knowledge had been threatened by, any
governmental or regulatory authority of the United States (other than the
Internal Revenue Service), the several States or territories (other than state
taxing authorities) or any foreign jurisdiction. There are no pending or
anticipated proceedings which may be expected to have a Material Adverse Effect
on the Company by or on behalf or in the name of the state or federal government
or any governmental agency relating to the imposition of civil monetary
penalties, exclusion or debarment from governmental programs or other
administrative sanctions.
2.20 ENVIRONMENTAL PROVISIONS.
(a) For the purposes of this Section 2.20, the following definitions apply.
"Environmental Claim" means any claim, action, cause of action, or written
notice by any person or entity alleging potential liability (including, without
limitation, potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries, or penalties) resulting from (A) the presence, or release
into the environment, of any Material of Environmental Concern at any location,
whether or not owned or operated by the Company or any subsidiary, or (B) any
violation, or alleged violation, of any Environmental Law. "Environmental Laws"
means all applicable federal, state or territorial, local and foreign laws and
regulations relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water, ground
water, land surface or subsurface strata), including, without limitation, laws
and regulations relating to emissions, discharges, releases or threatened
releases of Materials of Environmental Concern, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Materials of Environmental Concern. "Materials of
Environmental Concern" means chemicals, pollutants, contaminants, wastes, and
substances that are hazardous, toxic or otherwise a danger to health,
reproduction, or the environment or are regulated by Environmental Laws.
(b) The Company and its subsidiaries are in compliance in all material
respects with all applicable Environmental Laws, which compliance includes, but
is not limited to, the possession by them of all material permits and other
governmental authorizations required under applicable Environmental Laws, and
compliance in all material respects with the terms and conditions thereof,
except where the costs of any failure to comply will not exceed, in the
aggregate, $5,000,000. The Company and its subsidiaries have not received any
written communication, whether from a Governmental Authority, citizens group,
employee or otherwise, that alleges that they are not in such full compliance in
all material respects, and, to the knowledge of the Company, there are no
circumstances that may prevent or interfere with such full compliance in all
material respects in the future. To the knowledge of the Company, no current or
prior owner of any property owned or leased by the Company and its subsidiaries
has received any written communication, whether from a Governmental Authority,
citizens group, employee or otherwise, that alleges that the Company and its
subsidiaries is not in such compliance in all material respects.
(c) There is no material Environmental Claim pending or, to the knowledge
of the Company, threatened against the Company or a subsidiary or against any
person or entity whose liability for any Environmental Claim the Company and its
subsidiaries have or may have retained or assumed either contractually or by
operation of law, which Environmental Claim would reasonably be expected to have
a Material Adverse Effect on the Company.
18
<PAGE>
(d) To the knowledge of the Company, there are no past or present actions,
activities, circumstances, conditions, events or incidents, including, without
limitation, the release, emission, discharge, presence or disposal of any
Material of Environmental Concern, that could reasonably form the basis for any
material Environmental Claim against the Company or its subsidiaries or, to the
knowledge of the Company, against any person or entity whose liability for any
Environmental Claim the Company or a subsidiary has or may have retained or
assumed either contractually or by operation of law, which Environmental Claim
would reasonably be expected to have a Material Adverse Effect on the Company.
2.21 INTELLECTUAL PROPERTY.
(a) To the knowledge of the Company, all patents, registered trademarks and
registered copyrights of the Company are valid and enforceable. There are no
interference, opposition or cancellation proceedings or infringement suits
pending or, to the knowledge of the Company or its subsidiaries, threatened,
with respect to any of the patents, registered trademarks or copyrights. The
Company or its subsidiaries have not been advised, nor has either any reason to
believe that the Company or a subsidiary is infringing a patent, trademark or
copyright held by another person.
(b) The Company and its subsidiaries own or have in their possession
certain information of the sort typically considered as trade secrets in the
healthcare industry (the "Trade Secrets"). The Company and its subsidiaries have
taken commercially reasonable precautions to maintain Trade Secrets in
confidence and to prevent their disclosure to unauthorized persons. To the
knowledge of the Company, the Company and its subsidiaries have good title and
an absolute (though not necessarily exclusive) right to use all Trade Secrets
and the use of the Trade Secrets does not infringe the rights of any third
party.
(c) Except as set forth in the Company Disclosure Schedule, to the
knowledge of the Company and its subsidiaries, no person is infringing upon any
patent, trademark or any copyright or is misappropriating any Trade Secret owned
by the Company or a subsidiary. To the best of the Company or its subsidiaries'
knowledge, none of the processes or know-how used by the Company or its
subsidiaries infringes any patent, trademark or copyright of any third party. To
the best of the Company or its subsidiaries' knowledge, there is no intellectual
property, in any form, necessary for the operation of the Company and its
subsidiaries' business as currently conducted which the Company or a subsidiary
does not currently own or license on commercially reasonable terms.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF PACIFICARE AND HOLDING
Except as set forth in the disclosure schedule delivered to Company on the
date of the Original Agreement and signed by the Presidents of PacifiCare and
Holding, respectively (collectively, the "PacifiCare Disclosure Schedule"),
PacifiCare and Holding represent and warrant to the Company, as of the date of
the Original Agreement (except to the extent set forth in Section 6.1(b)) as
follows:
3.1 ORGANIZATION; SUBSIDIARIES; CAPITALIZATION.
(a) PacifiCare is a corporation duly organized, existing and in good
standing under the laws of the State of Delaware. Holding is a corporation duly
organized, existing and in good standing under the laws of the State of
Delaware. Neptune Sub and Company Sub are corporations duly organized, existing
and in good standing under the laws of the State of Delaware. Each of
PacifiCare, Holding, Neptune Sub and Company Sub has all necessary power and
authority under applicable corporate law and its organizational documents to own
or lease its properties and to carry on its business as presently conducted. As
of the date of the Original Agreement, the PacifiCare Disclosure Schedule set
forth a list of all of PacifiCare's subsidiaries. As of the date of the Original
Agreement, other than PacifiCare's subsidiaries, neither PacifiCare nor any of
its subsidiaries owned or held, directly or indirectly, any debt or equity
securities of, or had any other interest in, any corporation, partnership,
19
<PAGE>
joint venture or other entity, except publicly traded debt or equity which in
any event represented less than 1% of such outstanding securities, and neither
PacifiCare nor any of its subsidiaries had entered into any agreement to acquire
any such interest.
(b) Each of PacifiCare and its subsidiaries, to the extent conducting
business as an HMO, insurance company, third-party administrator or other entity
requiring any form of governmental licensure, qualification or authorization is
duly licensed, qualified or authorized and in good standing under the applicable
laws and regulations, respectively, of each state or territory in which the
conduct of such business requires such licensure, qualification or
authorization, except where failure would not have a material adverse effect on
PacifiCare or on any of its material subsidiaries as set forth in the PacifiCare
Disclosure Schedule ("PacifiCare Material Subsidiaries"). The conduct of
PacifiCare's and its subsidiaries' respective business is in conformity with all
applicable foreign, federal, state or territorial, local and other governmental
and regulatory requirements and the forms, procedures and practices of
PacifiCare and its subsidiaries in the conduct of their respective businesses
are also in compliance with all such requirements, to the extent applicable,
except where nonconformity or noncompliance would not constitute a Material
Adverse Effect on PacifiCare. For purposes of this Agreement, "Material Adverse
Effect," as it applies to PacifiCare, means a material adverse effect on the
business, operations, financial condition or assets of PacifiCare and its
subsidiaries, taken as a whole, other than as a result of the performance by
PacifiCare or Holding of their obligations, or the exercise by the Company of
its rights, under this Agreement.
(c) As of the date of the Original Agreement, the authorized capital stock
of PacifiCare consisted of: 100,000,000 shares of PacifiCare Class A Common
Stock and 100,000,000 shares of PacifiCare Class B Common Stock of which, as of
the date of the Original Agreement, 12,370,758 shares of PacifiCare Class A
Common Stock and 18,812,799 of PacifiCare Class B Common Stock were issued and
outstanding; and 20,000,000 shares of preferred stock, par value $1.00 per
share, of which, as of the date of the Original Agreement, no shares of were
issued and outstanding. All the issued and outstanding shares of PacifiCare
Class A Common Stock and PacifiCare Class B Common Stock are validly issued,
fully paid and nonassessable and free of preemptive rights. As of the date of
the Original Agreement, PacifiCare had issued outstanding options to purchase a
total of 317,734 shares of PacifiCare Class A Common Stock and 1,742,939 shares
of PacifiCare Class B Common Stock (the "PacifiCare Options") pursuant to
PacifiCare's stock option plans and agreements. Except as set forth above, as of
the date of the Original Agreement, (i) there were no shares of capital stock of
PacifiCare authorized, issued or outstanding, (ii) there were no outstanding
subscriptions, options, warrants, stock appreciation right plans, calls, rights,
convertible securities, stockholder rights plans (or similar plans commonly
referred to as "poison pills") or other agreements or commitments of any
character relating to issued or unissued capital stock or other securities of
PacifiCare or any of its subsidiaries, or obligating PacifiCare or any other
party to issue, transfer or sell any shares of the capital stock or other
securities of PacifiCare or any of its subsidiaries, and (iii) there were no
other outstanding securities convertible into, exchangeable for or evidencing
the right to subscribe for any shares of the capital stock or other securities
of PacifiCare or any of its subsidiaries or any successor corporation or
controlling person of such successor corporation. The authorized capital of
Holding, Neptune Sub and Company Sub each consists of 1,000 shares of Common
Stock, par value $.001 per share, of which; in the case of Holding, 200 shares
are issued and outstanding and are held beneficially and of record by
PacifiCare, while in the case of Neptune Sub and Company Sub, 100 shares of
which are issued and outstanding are held beneficially and of record by Holding.
(d) Each subsidiary of PacifiCare is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and has all necessary power and authority under applicable
corporate law to own and lease its properties and to carry on its business as
presently conducted. All of the outstanding shares of capital stock of each
subsidiary of the Company are validly issued, fully paid and nonassessable and
are owned beneficially and of record by PacifiCare or another subsidiary of
PacifiCare, free and clear of any liens, claims or encumbrances.
20
<PAGE>
(e) Complete and accurate copies of the Certificate of Incorporation and
Bylaws (or other or comparable charter documents), each as amended to date, of
PacifiCare and each of its subsidiaries are filed as exhibits to PacifiCare SEC
Reports or have been made available to the Company.
3.2 SEC FILINGS; FINANCIAL STATEMENTS.
(a) PacifiCare has made available to the Company a complete and accurate
copy of each report, schedule, registration statement and definitive proxy
statement filed by PacifiCare with the SEC on or after July 1, 1995 (the
"PacifiCare SEC Reports"), which are all the forms, reports and documents
required to be filed by PacifiCare with the SEC since July 1, 1995. The
PacifiCare SEC Reports (i) complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be, at
and as of the times they were filed (or, if amended or superseded by a filing
prior to the date of this Agreement, then on the date of such filing) and (ii)
did not at and as of the time they were filed (or, if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such filing)
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(b) Each of the sets of financial statements (including, in each case, any
related notes thereto) contained in the PacifiCare SEC Reports and the set of
PacifiCare's unaudited interim financial statements as of and for the nine-month
period ended June 30, 1996 including PacifiCare's unaudited consolidated balance
sheet as of June 30, 1996 (the "PacifiCare June 30, 1996 Balance Sheet") that
are attached to the PacifiCare Disclosure Schedule (collectively, the
"PacifiCare Past Financial Statements") were prepared in accordance with GAAP
applied on a consistent basis throughout the periods involved (except as may be
indicated in the notes thereto) and fairly present the consolidated financial
position of PacifiCare and its subsidiaries as at the respective dates thereof
and the consolidated results of its operations and cash flows for the periods
indicated, except that (i) the quarterly unaudited interim financial statements
included in the PacifiCare Past Financial Statements were or are subject to
normal year-end audit adjustments and (ii) the unaudited interim financial
statements as of and for the nine-month period ended June 30, 1996 included in
the PacifiCare Past Financial Statements are subject to normal year-end audit
adjustments and do not contain footnotes.
(c) PacifiCare and its subsidiaries have no Liabilities, except for (i) any
Liability which is accrued or fully reserved against in the PacifiCare June 30,
1996 Balance Sheet or disclosed in the notes included in the PacifiCare Past
Financial Statements, (ii) any Liability which was incurred after June 30, 1996
in the ordinary course of business, (iii) other Liabilities which, individually
or in the aggregate, have not had and would not reasonably be expected to have a
Material Adverse Effect on PacifiCare or (iv) any Liability under or disclosed
in this Agreement.
3.3 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since June 30, 1996, there has
not been (a) any change, or any development or combination of changes or
developments that has had or would reasonably be expected to have a Material
Adverse Effect on PacifiCare, (b) any damage, destruction or loss, whether or
not covered by insurance, that has had or would reasonably be expected to have a
Material Adverse Effect on PacifiCare or (c) except as permitted or required in
this Agreement, any transaction, commitment, dispute or other event or condition
(financial or otherwise) of any character (whether or not in the ordinary course
of business) which would be prohibited by Section 4.3(a), 4.3(b), 4.3(c),
4.3(d), 4.3(e), 4.3(f), 4.3(g) or 4.3(h), if it were to occur or be effected
between the date of the Original Agreement and the Effective Time.
3.4 TAX MATTERS.
(a) PacifiCare (or, if applicable, one of its subsidiaries) has filed,
within the time (including any extensions of applicable due dates) and in the
manner prescribed by law, all Returns, required to be filed under federal,
state, local or any foreign laws regarding Taxes by PacifiCare and its
subsidiaries, except for such Returns the failure of which to timely file would
not result in a liability of more than $5,000,000.
21
<PAGE>
(b) PacifiCare (or, if applicable, one of its subsidiaries) has, within the
time (including any extensions of applicable due dates) and in the manner
prescribed by law, paid all Taxes (as defined below) that are due and payable,
except Taxes (i) for which adequate reserves have been established under the
Past Financial Statements, (ii) which are being contested in good faith or (iii)
which involve permanent differences in the aggregate less than $5,000,000 or
involve timing differences in the aggregate less than $10,000,000.
(c) PacifiCare and its subsidiaries have not filed (and will not file prior
to the Closing Date) any consent agreement under Section 341(f) of the Code or
agreed to have Section 341(f)(2) of the Code apply to any disposition of the
subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code)
owned by PacifiCare or any of its subsidiaries.
(d) No outstanding debt obligation of PacifiCare is "corporate acquisition
indebtedness" within the meaning of Section 279(b) of the Code.
(e) For purposes of this Article 3, "Taxes" shall mean all taxes, charges,
fees, levies, or other assessments of whatever kind or nature, including,
without limitation, all net income, gross income, gross receipts, sales, use,
value-added, ad valorem, transfer, franchise, profits, license, withholding,
payroll, employment, excise, estimated, severance, stamp, net worth,
environmental, occupancy or property taxes, fees, assessments or charges of any
kind whatsoever (together with any interest and any penalties, additions to tax
or additional amounts) imposed by any taxing authority (domestic or foreign)
upon or payable by PacifiCare or any of its subsidiaries.
3.5 CONTRACTS.
(a) PACIFICARE MATERIAL CONTRACTS. For purposes of this Agreement,
"PacifiCare Material Contracts" shall mean (i) each contract, agreement or other
arrangement of or involving PacifiCare or any of its subsidiaries with respect
to indebtedness for money borrowed in excess of $3,000,000 (other than trade
payables in the ordinary and usual course of business), including, but not
limited to, letters of credit, guaranties and swap and similar agreements; (ii)
each contract, agreement or other arrangement which limits or restricts the
ability of PacifiCare or any of its subsidiaries to compete or otherwise conduct
its business in any manner or place which materially affects PacifiCare or any
PacifiCare Material Subsidiary; (iii) each mortgage, contract, license, lease,
indenture or other agreement of PacifiCare or any of its subsidiaries (A) which
would be required by Rule 601(b)(10) of SEC Regulation S-K to be filed as an
exhibit to an Annual Report on Form 10-K (other than any employee benefit plan)
or (B) which constitutes any other liability (including, without limitation, any
guarantee, surety contract or similar instrument), obligation or transaction
and, in the case of any item referred to in this clause, is material to
PacifiCare and its subsidiaries or their businesses or prospects taken as a
whole; and (iv) for each state in which PacifiCare or its subsidiaries conducts
business as an HMO, insurance company, third-party administrator or otherwise
requiring licensure as set forth in Section 3.1(b), (A) the contracts with
employer or other groups or government agencies, (B) the contracts with
physician providers of health care services, (C) the contracts with providers of
hospital services and (D) the contracts with providers of non-hospital,
non-physician medical services, which are material to PacifiCare and its
subsidiaries or their businesses or prospects taken as a whole.
All PacifiCare Material Contracts are in full force and effect and are
binding upon PacifiCare and, to PacifiCare's knowledge, are binding on the other
parties thereto, except as enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws, both state and
federal, affecting the enforcement of creditors' rights or remedies in general
from time to time in effect and the exercise by courts of equity powers. To
PacifiCare's knowledge, no material default by PacifiCare or any of its
subsidiaries has occurred under any of the PacifiCare Material Contracts and (A)
no material default by any of the other contracting parties has occurred under
any of the PacifiCare Material Contracts and (B) no event has occurred which
with the giving of notice or the lapse of time, or both, would constitute a
material default by PacifiCare or any of its subsidiaries or any of the other
contracting parties.
22
<PAGE>
(b) The PacifiCare Disclosure Schedule sets forth a list of all claims,
other than invoices in the ordinary course of business, and claims made under
risk programs in the ordinary course of business made or, to PacifiCare's
knowledge, threatened against PacifiCare or any of its subsidiaries under each
PacifiCare Material Contract presently or heretofore in effect (including claims
for back charges, rebates, price reductions, breaches of product or service
warranties or for product or service liability for products manufactured or
sold), to the extent such claims have had or would reasonably be expected to
have a cost to PacifiCare or its subsidiaries in excess of $5,000,000 or have a
material adverse effect on PacifiCare or any PacifiCare Material Subsidiaries.
3.6 EMPLOYEES.
(a) "PacifiCare Employee Plan" means each "employee benefit plan," as
defined in Section 3(3) of ERISA, currently or previously maintained,
contributed to or entered into by PacifiCare or any ERISA Affiliate (as defined
below) under which PacifiCare or any ERISA Affiliate thereof has any present or
future obligation or liability. For purposes of this Section 3.6, "ERISA
Affiliate" shall mean any entity which is a member of (A) a "controlled group of
corporations," as defined in Section 414(b) of the Code, (B) a group of entities
under "common control," as defined in Section 414(c) of the Code, or (C) an
"affiliated service group," as defined in Section 414(m) of the Code, or
treasury regulations promulgated under Section 414(o) of the Code, any of which
includes PacifiCare. All material contributions due from PacifiCare with respect
to any of the PacifiCare Employee Plans have been made as required under ERISA
or have been accrued on PacifiCare's financial statements as of June 30, 1996.
Each PacifiCare Employee Plan has been maintained substantially in compliance
with its terms and with the requirements prescribed by any and all statutes,
orders, rules and regulations, including, without limitation, ERISA and the
Code, which are applicable to such PacifiCare Employee Plans, except as would
not have a Material Adverse Effect on PacifiCare.
(b) No PacifiCare Pension Plan constitutes, or has since the enactment of
ERISA constituted, a "multiemployer plan," as defined in Section 3(37) of ERISA.
No PacifiCare Pension Plans are subject to Title IV of ERISA. No "prohibited
transaction," as defined in Section 406 of ERISA or Section 4975 of the Code,
has occurred with respect to any PacifiCare Employee Plan which is covered by
Title I of ERISA which would have a Material Adverse Effect on PacifiCare,
excluding transactions effected pursuant to a statutory or administrative
exemption. Nothing done or omitted to be done by PacifiCare and no transaction
or holding of any asset under or in connection with any PacifiCare Employee Plan
has or will make PacifiCare or any officer or director of PacifiCare subject to
any material liability under Title I of ERISA or liable for any material tax or
penalty pursuant to Sections 4972, 4975, 4976 or 4979 of the Code or Section 502
of ERISA.
(c) With respect to each PacifiCare Pension Plan that is intended to be
qualified under Section 401(a) of the Code (a "PacifiCare 401(a) Plan"), either
(A) a favorable determination letter has been received from the IRS as to such
qualification under the Code as in effect immediately after the Tax Reform Act
of 1986, (B) an application for a favorable determination letter is pending that
was duly filed with the IRS prior to the expiration of the time within which
retroactive amendment relating back to the effective date of such plan may be
made under Section 401(b) of the Code and regulations or IRS pronouncements
thereunder, or (C) the time provided under Section 401(b) of the Code and
regulations or IRS pronouncements thereunder for making retroactive amendments
relating back to the effective date of such plan will not expire before the date
that is sixty (60) days after the date hereof, and there is no reason to believe
that any favorable determination letter will not be received.
(d) PacifiCare has provided, or will have provided prior to the Closing (as
defined in Section 1.3), to individuals entitled thereto all required notices
and coverage pursuant to Section 4980B of the Code and COBRA, with respect to
any "qualifying event" (as defined in Section 4980B(f)(3) of the Code) occurring
prior to and including the Closing, and no material tax payable on account of
Section 4980B of the Code has been incurred with respect to any current or
former employees (or their beneficiaries) of PacifiCare.
23
<PAGE>
3.7 LITIGATION AND CLAIMS; COMPLIANCE WITH LAW.
(a) Except as set forth in the PacifiCare Disclosure Schedule, there is, to
PacifiCare's knowledge, no Proceeding pending or threatened by or before any
court or Governmental Authority in which PacifiCare or any of its subsidiaries
is a party or otherwise involved or to which any of the business or assets of
PacifiCare or any of its subsidiaries is subject, which has or would reasonably
be expected to have (i) a potential liability in excess of $5,000,000 or (ii) a
material adverse effect on PacifiCare or any PacifiCare Material Subsidiary.
(b) Neither PacifiCare nor any of its subsidiaries is a party to any
decree, order or arbitration award (or agreement entered into in any Proceeding)
with respect to its properties, assets, personnel or business activities which
has had or would reasonably be expected (i) to have a potential cost to
PacifiCare or its subsidiaries in excess of $5,000,000 or (ii) to affect
materially the operations of PacifiCare or any PacifiCare Material Subsidiary.
(c) Except as set forth on the PacifiCare Disclosure Schedule or in
PacifiCare SEC Reports or other public filings with the SEC, neither PacifiCare
nor any of its subsidiaries is or has at any time since October 1, 1993, been in
violation of, or delinquent in respect to, any decree, order or arbitration
award or law, statute or regulation of, or agreement with, or any license or
permit from, any Governmental Authority to which any of its properties, assets,
personnel or business activities are subject or to which any of them is subject,
including laws, rules and regulations relating to the environment, insurance
companies, HMOs, third-party administrators or other businesses required to be
licensed under Section 3.1(b), occupational health and safety, employee
benefits, wages, workplace safety, equal employment opportunity and race,
religious, sex and age discrimination which has had or would reasonably be
expected (i) to have a potential cost to PacifiCare or its subsidiaries in
excess of $5,000,000 or (ii) to affect materially the operations of PacifiCare
or any PacifiCare Material Subsidiary.
3.8 PROPERTIES.
(a) PacifiCare and its subsidiaries have insurance policies adequate to
protect them against the risks so insured. Neither PacifiCare nor any of its
subsidiaries has done anything by way of action or inaction which might
invalidate any of such policies in whole or in part.
(b) PacifiCare and its subsidiaries own and hold title to all real and
other property reflected in the PacifiCare SEC Reports as owned by PacifiCare or
any of its subsidiaries, as the case may be.
3.9 DISCLOSURE.
(a) The copies of all documents furnished by PacifiCare pursuant to the
terms of this Agreement are complete and accurate copies of the originals.
(b) During the past 12 months, PacifiCare has timely filed all required
forms, reports and documents required to be filed with the SEC and the NASD.
(c) None of the information supplied or to be supplied by PacifiCare for
inclusion or incorporation by reference in the S-4 Registration Statement will,
at the time the S-4 Registration Statement is filed with the SEC or at the time
the S-4 Registration Statement becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. None of the information supplied or to be supplied by PacifiCare for
inclusion or incorporation by reference in the Prospectus/Proxy Statement, will,
at the time mailed to the stockholders of PacifiCare, at the time of the
PacifiCare Stockholders' Meeting (as defined in Section 4.6) and as of the
Effective Time, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading. The Prospectus/Proxy Statement will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations promulgated by the SEC thereunder.
24
<PAGE>
3.10 TRANSACTIONS WITH AFFILIATES. Except for compensation of employees,
every transaction between PacifiCare and any of its "affiliates" or their
"associates" (as such terms are defined in the rules and regulations of the SEC)
which is currently in effect or was consummated since October 1, 1995, and for
which disclosure is required by Item 404 of Regulation S-K promulgated by the
SEC, is set forth in the PacifiCare SEC Reports or the PacifiCare Disclosure
Schedule.
3.11 VOTE REQUIRED. The affirmative vote of the holders of a majority of
the outstanding PacifiCare Class A Common Stock is the only vote of the holders
of any class or series of PacifiCare's capital stock necessary to adopt and
approve this Agreement and the PacifiCare Merger, while the affirmative vote of
the holders of a majority of the outstanding PacifiCare Class A Common Stock and
of the holders of a majority of the outstanding PacifiCare Class B Common Stock,
each voting as a separate class, is necessary to adopt and approve an amendment
to the Certificate of Incorporation of PacifiCare to exempt the PacifiCare
Merger from a requirement of PacifiCare's Certificate of Incorporation that, in
the event of a merger or consolidation of PacifiCare, the holders of PacifiCare
Class B Common Stock shall receive the same consideration per share as the per
share consideration for the PacifiCare Class A Common Stock in such merger or
consolidation (the "PacifiCare Amendment") (such votes together being referred
to herein as the "Required PacifiCare Vote").
3.12 TAKEOVER PROVISIONS INAPPLICABLE. As of the date of the Original
Agreement and at all times on or prior to the Effective Date, Section 203 of the
DGCL was, and shall be, inapplicable to the PacifiCare Merger.
3.13 PACIFICARE ACTION. The Board of Directors of PacifiCare (at a meeting
duly called and held) has (a) determined that the PacifiCare Merger is advisable
and fair and in the best interests of PacifiCare and its stockholders, (b)
approved this Agreement, the PacifiCare Amendment and the PacifiCare Merger in
accordance with the provisions of Sections 242 and 251 of the DGCL, (c)
recommended the adoption and approval of this Agreement and the PacifiCare
Merger by the holders of PacifiCare Class A Common Stock and directed that the
PacifiCare Merger be submitted for consideration by PacifiCare's stockholders at
the PacifiCare Stockholders' Meeting, (d) recommended the adoption and approval
of the PacifiCare Amendment by the holders of PacifiCare Class A Common Stock
and PacifiCare Class B Common Stock and directed that the PacifiCare Amendment
be submitted for consideration by PacifiCare's stockholders at the PacifiCare
Stockholders' meeting, (e) taken all necessary steps to render Section 203 of
the DGCL inapplicable to the PacifiCare Merger and (f) as sole stockholder of
Holding, Neptune Sub and Company Sub, approved this Agreement and the Merger in
accordance with Section 251 of the DGCL.
3.14 ACTIONS BY HOLDING, NEPTUNE SUB AND COMPANY SUB. The Boards of
Directors of Holding, Neptune Sub and Company Sub (at meetings duly called and
held or by unanimous written consents) have respectively (a) determined that the
Mergers are advisable and fair and in the best interests of Holding, Neptune Sub
and Company Sub, (b) unanimously approved this Agreement and the Mergers in
accordance with the provisions of Section 251 of the DGCL, (c) taken all
necessary steps to render Section 203 of the DGCL inapplicable to the Mergers
and the other transaction contemplated herein. Holding, as the sole stockholder
of Neptune Sub and Company Sub, has also approved or will also approve this
Agreement and the Mergers.
3.15 FAIRNESS OPINION. PacifiCare and its Board of Directors has received
from Dillon, Read & Co., financial advisors to PacifiCare, an opinion dated
August 4, 1996, to the effect that the consideration to be paid to the
stockholders of PacifiCare in the PacifiCare Merger is fair, from a financial
point of view, to PacifiCare and its stockholders.
3.16 FINANCIAL ADVISOR. PacifiCare represents and warrants that except for
Dillon, Read & Co., no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the PacifiCare
Merger or any of the other transactions contemplated in this Agreement based
upon arrangements made by or on behalf of PacifiCare or any of its subsidiaries.
25
<PAGE>
3.17 ENFORCEABILITY. Each of PacifiCare and Holding has full corporate
power and authority to execute, deliver and perform each of the Transactional
Agreements to which it is or will become a party. The execution and delivery of
said Transactional Agreements have been duly and validly authorized by the
Boards of Directors of PacifiCare and Holding, and no other corporate
proceedings on the part of PacifiCare and Holding are necessary for PacifiCare
and Holding to authorize any of the Transactional Agreements, and no such
proceedings (other than the approval of PacifiCare's and Holding stockholders)
are necessary to enable PacifiCare and Holding to perform or consummate any of
the transactions contemplated by this Agreement. Said Transactional Agreements
(a) have been (or will be) duly executed and delivered by duly authorized
officers of PacifiCare and Holding and (b) constitute (or, when executed by
PacifiCare and Holding, will constitute) legal, valid and binding obligations of
PacifiCare and Holding enforceable against it in accordance with their terms
(except as enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws, both state and federal,
affecting the enforcement of creditors' rights or remedies in general from time
to time in effect and the exercise by courts of equity powers). For purposes of
this Article 3, "Transactional Agreements" means this Agreement and the related
Agreement of Merger for the PacifiCare Merger.
3.18 GOVERNMENTAL CONSENTS; NO CONFLICTS. Except as may be required by the
Exchange Act, the Securities Act, state securities or blue sky laws, the DGCL,
the HSR Act, the NASD Bylaws (as they relate to the S-4 Registration Statement
and the Prospectus/Proxy Statement) and laws governing insurance companies,
HMOs, third-party administrators or other businesses operated by PacifiCare or
its subsidiaries requiring licensure, qualification or authorization, there is
no requirement applicable to PacifiCare or any of its subsidiaries to make any
filing with, or to obtain any permit, authorization, consent or approval of any
Governmental Authority as a condition to the lawful consummation of any of the
transactions contemplated by this Agreement, except for such filings, permits,
authorizations, consents or approvals which, if not made or obtained, would not
have a Material Adverse Effect on PacifiCare. Except as set forth in the
PacifiCare Disclosure Schedule, neither the execution and delivery of this
Agreement by PacifiCare nor the consummation by PacifiCare will (a) conflict
with, violate or result in any breach of any provision of the Certificate of
Incorporation or Bylaws (or comparable charter documents) of PacifiCare or any
of its subsidiaries, (b) result in a material default (or with notice or lapse
of time or both would result in a default) under, or materially impair the
rights of PacifiCare or any of its subsidiaries or materially alter the rights
or obligations of any third party under, or require PacifiCare or any of its
subsidiaries to make any material payment or become subject to any material
liability to any third party under, or give rise to any right of termination,
amendment, cancellation, acceleration, repurchase, put or call under, any of the
terms, conditions or provisions of any PacifiCare Material Contract, (c) result
in the creation of any material (individually or in the aggregate) liens,
charges or encumbrances on any of the material assets of PacifiCare or any of
its subsidiaries or (d) conflict with or violate any law, statute, rule,
regulation, judgment, order, writ, injunction, decree or arbitration award
applicable to PacifiCare or any of its subsidiaries or any of their material
assets, which violation has had or would reasonably be expected to have a
Material Adverse Effect on PacifiCare.
3.19 COMMON AND PREFERRED STOCK TO BE ISSUED. The Holding Class A Common
Stock, Holding Class B Common Stock and Holding Series A to be issued to the
Company's stockholders in the Company Merger, when issued by Holding pursuant to
the terms of this Agreement, will be duly authorized, validly issued, fully paid
and non-assessable, will be issued in compliance with applicable federal and
state securities laws and will be clear of all liens, encumbrances and adverse
claims and may be resold by Company Affiliates (as defined in Section 4.12) in
accordance with paragraph (d) of Rule 145 of the Securities Act.
3.20 RESERVES. The reserves established by PacifiCare and its subsidiaries
in the PacifiCare SEC Reports, or in any financial statement or balance sheet
contained in any document filed with the SEC after the date of the Original
Agreement, for statutorily required reserves and for incurred but not yet paid
claims for, or relating to, medical treatment or similar claims (i) are computed
in
26
<PAGE>
accordance with presently accepted industry standards consistently applied, (ii)
meet the requirements of any law, rule or regulation applicable to such
reserves, (iii) are computed on the basis of assumptions consistent with those
used in computing the corresponding reserve in the prior fiscal year, and (iv)
include provision for all actuarial reserves and related items which ought to be
established in accordance with applicable laws or regulations and prudent
industry practices. As of the date of the Original Agreement, neither PacifiCare
nor its senior management was aware of any fact or circumstance which would
necessitate, in the good faith application of prudent reserving practices and
policies, any material adverse change in statutorily required reserves or
reserves for such incurred but not yet paid claims above that reflected in the
most recent balance sheet included in the PacifiCare SEC Reports (other than
increases consistent with past experience resulting from increases in enrollment
with respect to PacifiCare's subsidiaries' services).
3.21 AUDITS OR INVESTIGATIONS BY GOVERNMENTAL ENTITIES. As of the date of
the Original Agreement, other than as disclosed in the PacifiCare Disclosure
Schedule, no audit or investigation of PacifiCare or any of its subsidiaries
which may be expected to have a Material Adverse Effect on PacifiCare was
pending before, or to PacifiCare's knowledge had been threatened by, any
governmental or regulatory authority of the United States (other than the IRS),
the several States or territories (other than state taxing authorities) or any
foreign jurisdiction. There are no pending or anticipated proceedings which may
be expected to have a Material Adverse Effect on PacifiCare by or on behalf or
in the name of the state or federal government or any governmental agency
relating to the imposition of civil monetary penalties, exclusion or debarment
from governmental programs or other administrative sanctions.
3.22 ENVIRONMENTAL PROVISIONS.
(a) For the purposes of this Section 3.22, the following definitions apply.
"Environmental Claim" means any claim, action, cause of action, or written
notice by any person or entity alleging potential liability (including, without
limitation, potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries, or penalties) resulting from (A) the presence, or release
into the environment, of any Material of Environmental Concern at any location,
whether or not owned or operated by PacifiCare or any subsidiary, or (B) any
violation, or alleged violation, of any Environmental Law. "Environmental Laws"
means all applicable federal, state or territorial, local and foreign laws and
regulations relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water, ground
water, land surface or subsurface strata), including, without limitation, laws
and regulations relating to emissions, discharges, releases or threatened
releases of Materials of Environmental Concern, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Materials of Environmental Concern. "Materials of
Environmental Concern" means chemicals, pollutants, contaminants, wastes, and
substances that are hazardous, toxic or otherwise a danger to health,
reproduction, or the environment or are regulated by Environmental Laws.
(b) PacifiCare and each subsidiary is in compliance in all material
respects with all applicable Environmental Laws, which compliance includes, but
is not limited to, the possession by them of all material permits and other
governmental authorizations required under applicable Environmental Laws, and
compliance in all material respects with the terms and conditions thereof except
where the costs of any failure to comply will not exceed $5,000,000. PacifiCare
and its subsidiaries have not received any written communication, whether from a
Governmental Authority, citizens group, employee or otherwise, that alleges that
they are not in such full compliance in all material respects, and, to the
knowledge of PacifiCare, there are no circumstances that may prevent or
interfere with such full compliance in all material respects in the future. To
the knowledge of PacifiCare, no current or prior owner of any property owned or
leased by PacifiCare or any subsidiary has received any written communication,
whether from a Governmental Authority, citizens group, employee or otherwise,
that alleges that any of them is not in such compliance.
27
<PAGE>
(c) There is no material Environmental Claim pending or, to the knowledge
of PacifiCare, threatened against PacifiCare or any subsidiary or against any
person or entity whose liability for any Environmental Claim PacifiCare has or
may have retained or assumed either contractually or by operation of law.
(d) To the knowledge of PacifiCare, there are no past or present actions,
activities, circumstances, conditions, events or incidents, including, without
limitation, the release, emission, discharge, presence or disposal of any
Material of Environmental Concern, that could reasonably form the basis for any
Environmental Claim against PacifiCare, any subsidiary or, to the knowledge of
PacifiCare, against any person or entity whose liability for any material
Environmental Claim PacifiCare or any subsidiary has or may have retained or
assumed either contractually or by operation of law, which Environmental Claim
would reasonably be expected to have a Material Adverse Effect on PacifiCare.
3.23 INTELLECTUAL PROPERTY.
(a) To the knowledge of PacifiCare, PacifiCare and its subsidiaries own or
have in their possession certain information of the sort typically considered as
trade secrets in the healthcare industry (the "Trade Secrets"). PacifiCare and
its subsidiaries have good title and an absolute (though not necessarily
exclusive) right to use all Trade Secrets, and, to the knowledge of PacifiCare,
the use of the Trade Secrets does not infringe the rights of any third party.
(b) To the knowledge of PacifiCare, none of the processes or know-how used
by PacifiCare infringes any patent, trademark or copyright of any third party.
To the best of PacifiCare's knowledge, there is no intellectual property, in any
form, necessary for the operation of PacifiCare's or its subsidiaries' business
as currently conducted which PacifiCare or its subsidiaries do not currently own
or license on commercially reasonable terms.
3.24 FORMATION OF HOLDING. PacifiCare has caused Holding, Neptune Sub and
Company Sub to be formed and organized in anticipation of execution of this
Agreement and solely for the purposes of carrying out the Mergers and the
transactions contemplated hereby, and solely for such purposes (i) Holding has
issued 200 shares of Common Stock to PacifiCare in exchange for $1.00 per share;
(ii) Neptune Sub has issued 100 shares of Common Stock to Holding in exchange
for $1.00 per share, and (iii) Company Sub has issued 100 shares of Common Stock
to Holding in exchange for $1.00 per share. No other shares of stock or
securities have been issued by Holding, Neptune Sub or Company Sub. The
directors and officers of Holding, Neptune Sub and Company Sub consist solely of
officers of PacifiCare and no other persons. Neither Holding, Neptune Sub nor
Company Sub has acquired any property, incurred any liabilities, or engaged in
any business or activity whatsoever other than (i) its organization as described
above, (ii) the adoption of stockholder and director resolutions in connection
therewith and to authorize execution and delivery of this Agreement, adoption of
the Holding Restated Certificate of Incorporation, consummation of the Mergers
and the transactions contemplated hereby, and performance of its obligations
hereunder, and (iii) the execution and delivery of this Agreement.
ARTICLE 4
CONDUCT AND TRANSACTIONS PRIOR TO
EFFECTIVE TIME; ADDITIONAL AGREEMENTS
4.1 INFORMATION AND ACCESS.
(a) During the period from the date of this Agreement through the Effective
Time, the Company shall afford, and shall cause the independent auditors,
counsel, financial and other advisors and representatives (collectively,
"Representatives") of the Company and its subsidiaries to afford, to PacifiCare
and to PacifiCare's Representatives, reasonable access to the properties, books,
records, financial and operating data (including audit work papers and other
such information) and other
28
<PAGE>
information and personnel of the Company and its subsidiaries in order that
PacifiCare and PacifiCare's Representatives may have a full opportunity to make
such investigation as PacifiCare reasonably desires to make of the Company and
its subsidiaries.
(b) Without limiting the generality of Section 4.1(a), during the period
from the date of this Agreement through the Effective Time, the Company shall
promptly provide PacifiCare with copies of any notice, report or other document
filed with or sent to any Governmental Authority in connection with any of the
transactions contemplated by this Agreement.
(c) No investigation by PacifiCare or any of its Representatives pursuant
to this Section 4.1 shall limit or otherwise affect any representations or
warranties of the Company or any condition to any obligation of PacifiCare.
(d) During the period from the date of this Agreement through the Effective
Time, the Company shall promptly advise PacifiCare in writing of (A) any
Material Adverse Effect on the Company and (B) the occurrence of any event which
causes the representations and warranties made by the Company in this Agreement
or the information included in the Company Disclosure Schedule to be incomplete
or inaccurate in any material respect.
(e) The rights and obligations of PacifiCare and the Company in this
Section 4.1 shall apply, MUTATIS MUTANDIS, to the Company and PacifiCare.
4.2 CONDUCT OF BUSINESS OF THE COMPANY.
(a) Except as provided in Section 4.2(b), during the period from the date
of this Agreement through the Effective Time, (i) the Company shall conduct its
business, and shall cause each of its subsidiaries to conduct its business, in
the ordinary and usual course consistent with past practice and (ii) the Company
shall use, and shall cause each of its subsidiaries to use, all commercially
reasonable efforts to maintain and preserve intact its business organization, to
keep available the services of its officers and employees and to maintain
satisfactory relations with lessors, suppliers, contractors, distributors,
customers and others having business relationships with the Company or any of
its subsidiaries (it being recognized, however, that nothing in this Agreement
shall be construed to hold the Company liable for any adverse effect that the
announcement of the transactions contemplated by this Agreement may have on such
business organizations and relationships, including on decisions of officers and
employees whether to continue to provide services to the Company or its
subsidiaries).
(b) Except as expressly contemplated by this Agreement, during the period
from the date of this Agreement through the Effective Time, the Company shall
not do, and shall not permit any of its subsidiaries to do, any of the
following, without PacifiCare's prior written consent:
(i) declare, set aside or pay any dividend or make any other
distribution in respect of any capital stock, except (A) regular dividends
on the Company Series A Preferred Stock and (B) dividends from the
subsidiaries of the Company to the Company sufficient to allow the Company
to make the dividends referred to in clause (A);
(ii) split, combine or reclassify any capital stock of the Company or
repurchase, redeem or otherwise acquire any capital stock of the Company or
any of its subsidiaries, except pursuant to contractual rights in existence
on the date of the Original Agreement;
(iii) except for (x) the issuance of up to 900,000 Talbert stock options
to be granted to Talbert employed or managed physicians in connection with
the separation of Talbert from the Company, (y) the issuance of up to 10,000
Company Options per individual and the issuance of up to 75,000 Company
Options in the aggregate to be granted in connection with the Company's new
hires, outstanding performances or promotions, or (z) previously authorized
automatic grants of Company Options to the Company's or its subsidiaries'
directors, issue, deliver, pledge, encumber, sell or transfer, or authorize
or propose the issuance, delivery, pledge, encumbrance, sale or transfer of,
any shares of capital stock of the Company or any of its subsidiaries or any
securities convertible into, or rights, warrants or options to acquire, any
such shares of capital stock or other
29
<PAGE>
convertible securities (except that the Company may issue Company Common
Stock upon the exercise of Company Options issued and outstanding or upon
the conversion of Company Series A Preferred Stock into Company Common
Stock), or, except as expressly contemplated herein, make any change in its
equity capitalization or to the terms of any option, warrant or other equity
security of the Company or any of its subsidiaries that is currently
outstanding;
(iv) except as expressly contemplated herein, amend the Certificate of
Incorporation, Bylaws or other organizational or charter documents of the
Company or any of its subsidiaries, or amend its Restated Rights Plan;
(v) acquire (by merging or consolidating with, by purchasing any
material portion of the capital stock or assets of or by any other means)
any business or any corporation, partnership, association or other business
organization or division thereof;
(vi) sell, lease, pledge or otherwise dispose of or encumber any of its
material assets, except in the ordinary course of business consistent with
past practice or consistent with written disclosure made to PacifiCare prior
to the date of the Original Agreement;
(vii) except pursuant to lines of credit and subject to credit limits in
effect prior to the date of the Original Agreement, incur any indebtedness
for borrowed money, or issue or sell any debt securities or guarantee,
endorse or otherwise become responsible for any obligation of any other
person, provided that this Section 4.2(b)(vii) shall not apply to
indebtedness for borrowed money, debt securities or guaranties that
aggregate up to $20,000,000 or the proceeds of which are used to capitalize
Talbert in accordance with Section 4.15;
(viii) except as specifically contemplated by Section 4.8, adopt or amend
in any material respect any collective bargaining agreement or Company
Employee Plan, or enter into or amend any employment agreement, severance
agreement, special pay arrangement with respect to termination of employment
or other similar arrangement or agreement with any director or officer, or
enter into or amend any severance or termination arrangement with any
director or officer;
(ix) change in any material respect the accounting methods or practices
followed by the Company (including any material change in any assumption
underlying, or any method of calculating, any bad debt, contingency or other
reserve), except as may be required by changes in GAAP;
(x) except in the ordinary course of business consistent with past
practice or as permitted in Section 4.4(a), enter into any material contract
or agreement involving payments in excess of market rates;
(xi) except as specifically contemplated by Section 4.8, change any
compensation payable or to become payable to any of its officers or
employees (other than any adjustment to the salary of any employee that is
made in the ordinary course of business consistent with past practice and
that does not exceed the higher of 6% of such employee's previous salary or
$10,000 or that is made in accordance with a budget approved in writing by
PacifiCare);
(xii) make any capital expenditures in excess of $2,500,000 in the
aggregate, except those set forth in a budget to be reviewed and approved by
PacifiCare and the Company within two weeks following the date of the
Original Agreement;
(xiii) make any loan to or engage in any transaction with any director or
officer;
(xiv) settle or compromise any lawsuit or other Proceeding against the
Company or any of its subsidiaries for an amount in excess of $5,000,000;
provided, however, that in no event shall the Company or its subsidiaries
settle or compromise any matter in a manner which would have a material
non-financial adverse impact on the Company or its Material Subsidiaries;
30
<PAGE>
(xv) cause or permit any material amendment, modification or premature
termination to any Company Material Contract as defined Section 2.5(a)
without the prior approval of PacifiCare, such approval not to be
unreasonably withheld and to be given or not given on a timely basis;
(xvi) cause or agree to the termination or material modification of any
material licensure, qualification, or authorization of the Company or any
Material Subsidiary;
(xvii) enter into any new contract or amend or modify any existing
contract between the Company or any subsidiary and Talbert or to cause any
capital transfer to or from the Company or any subsidiary and from or to
Talbert, except as contemplated by Section 4.15; or
(xviii) enter into any contract, agreement, commitment or arrangement
contemplating any of the foregoing.
4.3 CONDUCT OF BUSINESS OF PACIFICARE. Except as expressly contemplated by
this Agreement, during the period from the date of this Agreement through the
Effective Time, PacifiCare shall not, without the Company's prior written
consent:
(a) declare, set aside or pay any dividend or make any other distribution
in respect of any capital stock;
(b) split, combine or reclassify any capital stock of PacifiCare or
repurchase, redeem or otherwise acquire any capital stock of PacifiCare, except
pursuant to contractual rights presently in existence;
(c) issue, deliver, pledge, encumber, sell or transfer, or authorize or
propose the issuance, delivery, pledge, encumbrance, sale or transfer of, any
shares of capital stock of PacifiCare or any of its subsidiaries or any
securities convertible into, or rights, warrants or options to acquire, any such
shares of capital stock or other convertible securities (except that PacifiCare
may issue PacifiCare Class A Common Stock or PacifiCare Class B Common Stock
upon the exercise of PacifiCare Options issued and outstanding on the date of
the Original Agreement in accordance with their present terms), or, except as
expressly contemplated herein, make any change in its equity capitalization or
to the terms of any option, warrant or other equity security of the Company or
any of its subsidiaries that is currently outstanding;
(d) except as expressly contemplated herein, amend the Certificate of
Incorporation, Bylaws or other organizational or charter documents of PacifiCare
or any of its subsidiaries;
(e) acquire (by merging or consolidating with, by purchasing any material
portion of the capital stock or assets of or by any other means) any business or
any corporation, partnership, association or other business organization or
division thereof;
(f) sell, lease, pledge or otherwise dispose of or encumber any of its
material assets, except in the ordinary course of business consistent with past
practice or consistent with written disclosure made to Company prior to the date
of the Original Agreement;
(g) except pursuant to lines of credit and subject to credit limits in
effect prior to the date of the Original Agreement, incur any indebtedness for
borrowed money, or issue or sell any debt securities or guarantee, endorse or
otherwise become responsible for any obligation of any other person, provided
that this Section 4.2(g) shall not apply to indebtedness for borrowed money,
debt securities or guaranties that aggregate up to $20,000,000 or to financing
the purpose of which is to consummate the Mergers;
(h) change in any material respect the accounting methods or practices
followed by PacifiCare (including any material change in any assumption
underlying, or any method of calculating, any bad debt, contingency or other
reserve), except as may be required by changes in GAAP;
(i) or enter into any contract, agreement, commitment or arrangement
contemplating any of the foregoing.
31
<PAGE>
4.4 NEGOTIATION WITH OTHERS.
(a) The Company shall not, and it shall not authorize or permit any of its
subsidiaries, officers, directors or employees or any of its or its
subsidiaries' Representatives, directly or indirectly, to (i) solicit, initiate
or knowingly encourage or induce the making of any Acquisition Proposal (as
defined in Section 7.1), (ii) furnish non-public information regarding the
Company or any of its subsidiaries in connection with an Acquisition Proposal or
potential Acquisition Proposal, (iii) negotiate or engage in discussions with
any third party with respect to any Acquisition Proposal, (iv) approve, endorse
or recommend any Acquisition Proposal or (v) enter into any letter of intent,
contract or other instrument related directly or indirectly to any Acquisition
Proposal (other than a nondisclosure agreement entered into in accordance with
Section 4.4(c) or contracts with advisors or consultants). Notwithstanding the
foregoing, nothing in this Section 4.4 shall be construed to prohibit the
Company or its Board of Directors from taking any actions or permitting any
actions described above (other than any action described in clause (i) above)
with respect to any Acquisition Proposal to the extent that the Board of
Directors of the Company shall conclude in good faith, based upon the advice of
its outside counsel, that such action is required in order for the Board of
Directors of the Company to act in a manner that is consistent with its
fiduciary obligations under applicable law (PROVIDED that, in the event any
letter of intent, contract or other instrument of the type described in clause
(v) of the preceding sentence is entered into, the consummation of any
transaction contemplated by the Acquisition Proposal to which such instrument
relates must be expressly conditioned upon the prior and valid termination of
this Agreement and the payment of any fee due under Article 7 hereof).
(b) The Company shall immediately advise PacifiCare orally and in writing
of the receipt of any Acquisition Proposal or any inquiry relating to an
Acquisition Proposal prior to the Effective Time, including a full description
of the terms of such Acquisition Proposal.
(c) Notwithstanding anything to the contrary contained herein, the Company
shall not furnish any information to any third party pursuant to clause (ii) of
the first sentence of Section 4.4(a) unless such third party has executed and
delivered to the Company a nondisclosure agreement that is not substantially
less restrictive than the nondisclosure agreement then in effect between the
Company and PacifiCare.
(d) The Company shall immediately cease and cause to be terminated any
discussions or negotiations with any parties existing as of the date of this
Agreement and that relate to any Acquisition Proposal and shall request the
return or destruction of all information previously disclosed to such parties in
accordance with the terms of any confidentiality agreements with such parties,
and shall use commercially reasonable efforts to ensure that such information is
returned or destroyed.
4.5 REGISTRATION STATEMENT; PROSPECTUS/PROXY STATEMENT.
(a) As promptly as practicable after the date of this Agreement, Holding
and PacifiCare shall prepare, with the assistance of the Company, and cause to
be filed with the SEC the S-4 Registration Statement, together with the
Prospectus/Proxy Statement and any other documents required by the Securities
Act or the Exchange Act in connection with the Mergers. Each of Holding,
PacifiCare and the Company shall use all commercially reasonable efforts to
cause the S-4 Registration Statement to comply with the rules and regulations
promulgated by the SEC, to respond promptly to any comments of the SEC or its
staff and to have the S-4 Registration Statement declared effective under the
Securities Act as promptly as practicable after such filing. The Company shall
promptly furnish to Holding and PacifiCare all information concerning the
Company, its subsidiaries and its stockholders as may be required or reasonably
requested in connection with any action contemplated by this Section 4.5. Each
of Holding, PacifiCare and the Company shall (i) notify the other promptly of
the receipt of any comments from the SEC or its staff and of any request by the
SEC or its staff for amendments or supplements to the S-4 Registration Statement
or the Prospectus/Proxy Statement or for additional information and (ii) shall
supply the other with copies of all correspondence with the SEC or its staff
with respect to the S-4 Registration Statement or the Prospectus/Proxy
Statement.
32
<PAGE>
Neither Holding, PacifiCare nor the Company shall file any amendment or
supplement to the S-4 Registration Statement or the Prospectus/Proxy Statement
to which the other shall have reasonably objected. Whenever any event occurs
that should be set forth in an amendment or supplement to the S-4 Registration
Statement or the Prospectus/Proxy Statement, Holding, PacifiCare or the Company,
as the case may be, shall promptly inform the other of such occurrence and shall
cooperate in filing with the SEC or its staff, and, if appropriate, mailing to
stockholders of the Company and PacifiCare, such amendment or supplement.
(b) Prior to the Effective Time, Holding shall make all required filings
with state regulatory authorities and the NASD and shall use all commercially
reasonable efforts to obtain all regulatory approvals needed to ensure that the
Holding Class A Common Stock, Holding Class B Common Stock and Holding Series A
to be issued in the Mergers (i) will be qualified under the securities or "blue
sky" law of every jurisdiction of the United States in which any registered
stockholder of the Company or PacifiCare has an address of record on the record
date for determining the stockholders entitled to notice of and to vote on the
Mergers and (ii) will be approved for quotation at the Effective Time on the
Nasdaq National Market or the NYSE.
(c) Prior to the Effective Time, Holding shall file either the Holding
Restated Certificate of Incorporation or the Holding Restated Certificate of
Incorporation without Series A, as the case may be, with the Secretary of State
of the State of Delaware.
4.6 STOCKHOLDERS' MEETINGS.
(a) The Company shall take all action necessary in accordance with
applicable law to call and convene a meeting of the holders of Company Common
Stock and Company Series A Preferred Stock (the "Company Stockholders' Meeting")
to consider, act upon and vote upon the adoption and approval of this Agreement,
the Company Merger and the Series A Amendment. The Company Stockholders' Meeting
will be held within 60 days after the S-4 Registration Statement is declared
effective by the SEC. The Company shall ensure that the Company Stockholders'
Meeting is called, held and conducted, and that all proxies solicited in
connection with the Company Stockholders' Meeting are solicited, in compliance
with applicable law.
(b) The Board of Directors of the Company has unanimously recommended (and
the Prospectus/ Proxy Statement shall include a statement to the effect that the
Board of Directors of the Company has unanimously recommended) that the holders
of Company Common Stock and Company Series A Preferred vote in favor of and
adopt and approve this Agreement, the Company Merger and the Series A Amendment
at the Company Stockholders' Meeting and any related amendment to the Company's
Certificate of Incorporation, which unanimous recommendation shall not be
withdrawn, amended or modified in a manner adverse to PacifiCare. For purposes
of this Agreement, it shall constitute a modification adverse to PacifiCare if
such recommendation shall no longer be unanimous.
(c) PacifiCare shall take all action necessary in accordance with
applicable law to call or convene a meeting of the holders of PacifiCare Class A
Common Stock and the PacifiCare Class B Common Stock (the "PacifiCare
Stockholders' Meeting") to consider, act upon and vote upon the approval of this
Agreement, the PacifiCare Merger, the PacifiCare Amendment and any related
matters. The PacifiCare Stockholders' Meeting will be held as close to the date
of the Company Stockholders' meeting as is practicable. PacifiCare shall ensure
that the PacifiCare Stockholder's Meeting is called, held and conducted, and
that all proxies solicited in connection with such meeting are solicited, in
compliance with applicable law.
(d) The Board of Directors of PacifiCare has recommended, with no
dissenting votes (and the Prospectus/Proxy Statement shall include a statement
to the effect that the Board of Directors has so recommended) that the holders
of PacifiCare Class A Common Stock vote in favor of this Agreement, the
PacifiCare Merger, and related matters and that the holders of PacifiCare Class
A Common Stock and PacifiCare Class B Common Stock vote in favor of the
PacifiCare Amendment.
33
<PAGE>
(e) Notwithstanding the foregoing, nothing in Section 4.5 or in this
Section 4.6 shall prevent the Board of Directors of the Company or PacifiCare
from withdrawing, amending or modifying its recommendation in favor of the
respective Mergers and approval and adoption of this Agreement and related
matters (and the Prospectus/Proxy Statement may reflect such withdrawal,
amendment or modification) to the extent that such Board of Directors of the
Company or PacifiCare shall conclude in good faith, based upon the advice of its
outside counsel, that such withdrawal, amendment or modification is required in
order for such Board of Directors to act in a manner that is consistent with its
fiduciary obligations under applicable law. Nothing contained in this Section
4.6(e) shall limit the Company's or PacifiCare's obligation to convene the
Company Stockholders' Meeting and the PacifiCare Stockholders' Meeting
(regardless of whether the recommendation of the Board of Directors of the
Company or PacifiCare, as the case may be, shall have been withdrawn, amended or
modified).
4.7 REGULATORY APPROVALS.
(a) Holding, the Company and PacifiCare shall use all reasonable efforts to
file and to cause any stockholders of the Company or PacifiCare, as the case may
be, to file as soon as practicable after the date of this Agreement all notices,
reports and other documents required by law to be filed with any Governmental
Authority with respect to the Mergers and the other transactions contemplated by
this Agreement and to submit promptly any additional information requested by
any such Governmental Authority. Without limiting the generality of the
foregoing, Holding, the Company and PacifiCare shall within fifteen (15)
business days from the date of the Original Agreement prepare and file the
notifications required under the HSR Act in connection with the Mergers.
Holding, the Company and PacifiCare shall respond as promptly as practicable to
(i) any inquiries or requests received from the Federal Trade Commission or the
Antitrust Division of the Department of Justice for additional information or
documentation and (ii) any inquiries or requests received from any state
attorney general or other Governmental Authority in connection with antitrust or
related matters.
(b) Holding, the Company and PacifiCare shall (i) give each other prompt
notice of the commencement of any Proceeding by or before any court or
Governmental Authority with respect to the Mergers or any of the other
transactions contemplated by this Agreement, (ii) keep each other informed as to
the status of any such Proceeding and (iii) except as may be prohibited by any
Governmental Authority or by any law or court order or decree, permit the other
party to be present at each meeting or conference relating to any such
Proceeding and to have access to and be consulted in advance in connection with
any document filed or provided to any Governmental Authority in connection with
any such Proceeding.
4.8 EMPLOYEE BENEFITS PLANS.
(a) At least twenty (20) days before the date of the Company Stockholders'
Meeting, PacifiCare shall notify the Company if it wishes to provide a mechanism
to cash out either vested or all outstanding Company Options. If PacifiCare
wishes to provide such a mechanism, PacifiCare shall offer (in a form reasonably
acceptable to the Company) to each holder of applicable Company Options, the
right to receive on the Effective Date, in return for the cancellation of such
option, an amount equal to (i) the product of the value of the consideration to
be received for each share of Company Common Stock covered by the cash out (with
stock values of Holding Common Stock measured by the average closing price as
quoted in the Wall Street Journal of PacifiCare's Class A Common Stock during
the twenty trading days ending the date immediately prior to the date of the
Company's Stockholder Meeting for Holding Class A Common Stock and by the
Average Pre-Vote Closing Share Price for Holding Class B Common Stock) times the
number of shares of Company Common Stock with respect to which such option is
exercisable, less (ii) the aggregate exercise price of such shares. The amount
paid to any holder of Company Options following such payment and cancellation
shall be net of applicable withholding taxes.
(b) On the Closing Date, and subject to any required approval of the
holders of Company Options, which the Company hereby covenants to exercise its
best efforts to obtain, Holding and PacifiCare will cause each Company Option to
be replaced effective as of the Effective Time, by a
34
<PAGE>
substitute option of Holding (an "Exchange Option") issued under a Holding stock
option plan that complies in all respects with the applicable requirements of
Rule 16b-3 promulgated under the Exchange Act. The per share exercise price of
an Exchange Option shall equal the quotient, rounding up to the nearest cent, of
(i) the per share exercise price of the corresponding Company Option, less the
average closing price at which the rights to acquire Talbert stock trade on
their first five trading days after issuance, as quoted in the Wall Street
Journal ("rights to acquire Talbert stock" for this purpose means the portion of
such a right into which one share of Company Common Stock is converted in part),
divided by (ii) the fraction of a share of Holding Class B Common Stock that the
holder of such Company Option is entitled to purchase for each share of Company
Common Stock subject to such Company Option, as determined in the next sentence.
For each share of Company Common Stock subject to such Company Option, the
Exchange Option shall entitle the holder thereof to purchase a fraction of a
share of Holding Class B Common Stock equal to the sum of (i) the fraction of a
share of Holding Class B Common Stock into which one (1) share of Company Common
Stock actually outstanding at the Effective Time is converted pursuant to
Article 1, plus (ii) the fraction of a share of Holding Class B Common Stock
that could be purchased at the Average Pre-Vote Closing Share Price for the
value of the PacifiCare Class A Common Stock into which one (1) share of Company
Common Stock actually outstanding at the Effective Time is converted pursuant to
Article 1, which value shall be the average closing price as quoted in the Wall
Street Journal of the PacifiCare Class A Common Stock during the same trading
days that the Average Pre-Vote Closing Share Price is determined, plus (iii) the
fraction of a share of Holding Class B Common Stock that could be purchased at
the Average Pre-Vote Closing Share Price for $17.50. Any restriction on the
exercise of any Company Option shall apply to the Exchange Option and the term,
exercisability, vesting schedule and other provisions of such Company Option
shall similarly apply to the Exchange Option; provided, however, that each such
Exchange Option shall, in accordance with its terms, be subject to further
adjustment as appropriate to reflect any stock split, stock dividend,
recapitalization or other similar transaction subsequent to the Effective Time;
provided, further, that in the case of an Exchange Option of a person who is an
employee of the Company or one of its subsidiaries, such Exchange Option shall
provide that (i) any unvested shares, the vesting of which depends on
achievement by the Company of earnings or financial performance of the Company
for a fiscal year beginning on or after July 1, 1996, shall instead vest no
later than 25% per year over a four year period, with the first 25% vesting on
July 1, 1997 and (ii) if the holder of such Exchange Option is terminated
without cause after the Closing Date and before the date as of which, determined
as of execution of this Agreement and assuming no termination of any employee
and the application of the vesting schedule set forth in clause (i) above, there
would remain no more than 100,000 of such Exchange Options in the aggregate that
are not vested, such option shall thereupon become fully vested; provided
further that in the case of an Exchange Option of a person who is an employee of
Talbert, if the rights offering described in Section 4.15(c) is consummated in
such a manner that Talbert would no longer be considered a subsidiary of FHP for
purposes of such Exchange Option, the employment of such person by FHP or one of
its subsidiaries shall be deemed terminated for the convenience of the Company
and the accelerated vesting rights set forth in the foregoing proviso shall not
apply; further provided, that, in the case of a holder of an Exchange Option who
is a director of the Company or one of its subsidiaries and who is not an
employee of the Company or any of its subsidiaries, the Exchange Option shall
vest immediately when such holder no longer is serving as a director of Holding
or Company or one of their subsidiaries. The Company, Holding and PacifiCare
shall take such reasonable actions, and cooperate with each other in all action,
that may be necessary and permissible to effectuate the provisions of this
Section 4.8(b), including without limitation, timely sending notice of the
Company's Board of Director's determination to suspend acceleration of vesting
of Company Options issues under the Company's Executive Incentive Plan. The
provisions of this Section 4.8(b) shall not limit in any manner PacifiCare's
right to cash out the vested portion of outstanding Company options under
Section 4.8(a). To the extent required under applicable law, the terms of the
applicable Company Option plans or under any agreement thereunder, the Company
shall obtain stockholder approval of the transactions contemplated by this
Section 4.8(b) and shall use its best efforts to obtain the consent of any
optionee whose consent may be required. As soon as practicable
35
<PAGE>
after the Effective Time, Holding shall file with the SEC a registration
statement on Form S-8 with respect to the shares of Holding Class B Common Stock
underlying the Exchange Options and use its reasonable best efforts to have such
registration statement declared effective under the Securities Act. The Company
may amend the employment agreements described in Schedule 2.6 of the Company
Disclosure Schedule to adjust the terms and conditions for vesting of Company
Options held by employees party to such agreements, provided the adjusted
vesting is no more favorable than acceleration upon a "Change of Control" as
defined in such agreements and does not render nondeductible to the Company any
amounts under Section 280G of the Code, and further provided any such adjustment
shall neither increase other benefits or amounts payable by the Company nor
increase the number of shares or decrease the exercise price under any Company
Option now outstanding.
(c) Either (i) the Company shall cause the Company's Employee Stock
Purchase Plan to be terminated immediately prior to the Effective Time, and such
termination shall have the effects set forth in such Plan, or (ii) prior to the
Effective Time, Holding, Company and PacifiCare shall cause each right to
purchase Company Common Stock to be replaced, effective as of the Effective
Time, by a substitute right to purchase shares of Holding Class B Common Stock
("Exchange Purchase Right") issued under a Holding Employee Stock Purchase Plan
("Holding Purchase Plan") that is intended to comply with Section 423 of the
Code. The purchase price of shares of Holding Class B Common Stock under an
Exchange Purchase Right shall be equal to 85% of the fair market value of
Holding Class B Common Stock on the first date on which shares of Holding Class
B Common Stock are purchased under the terms of the Holding Purchase Plan. The
terms and conditions of each Exchange Purchase Right shall satisfy the
requirements of Section 424(a) of the Code.
(d) As of the Effective Time and for a period of not less than one year
thereafter, except to the extent required to satisfy applicable, governing law,
Holding shall, or shall cause the Company Surviving Corporation and its
subsidiaries, to provide employee benefits other than those addressed in Section
4.8(a), 4.8(b) or 4.8(c) which are either (i) no less favorable on an aggregate
basis to the benefits provided by the Company or its subsidiaries prior to the
Effective Time or (ii) as provided to similarly situated employees of PacifiCare
and its subsidiaries. Thereafter, to the extent that employees of the Company
Surviving Corporation or its subsidiaries participate in benefit plans of
Holding, for purposes of eligibility of such employees for such employee
benefits, Holding agrees to credit such employee's service with the Company or
its subsidiaries for such purposes as vesting, calculation of benefits, and
eligibility to participate and, if applicable, to waive any pre-existing
condition limitations related thereto to the extent permitted by such plans as
currently in effect and applicable law. Holding and PacifiCare shall cause the
Company's and its subsidiaries' employees to be offered the right to participate
in Holding's and its subsidiaries' stock option plans and arrangements upon
substantially consistent terms.
(e) STOCK OPTIONS OF PACIFICARE. At the Effective Time, each outstanding
option to purchase shares of PacifiCare Class B Common Stock (a "PacifiCare
Class B Option") under any of PacifiCare's stock options plans, shall be
canceled and Holding shall issue in substitution therefor an option to purchase
Holding Class B Common Stock (a "Holding Class B Substitute Option") issued
under a Holding stock option plan to be adopted by Holding prior to the
Effective Time. The exercise price and the number of shares of Holding Class B
Common Stock subject to each Holding Class B Substitute Option shall be
identical to the exercise price and the number of shares of PacifiCare Class B
Common Stock subject to the PacifiCare Class B Option that such Holding Class B
Substitute Option replaces. In compliance with Section 424(a) of the Code, each
such Holding Class B Substitute Option shall be subject to substantially all of
the other terms and conditions of PacifiCare stock option it replaces. At the
Effective Time, each outstanding option to purchase shares of PacifiCare Class A
Common Stock (a "PacifiCare Class A Option") shall be converted into an option
to purchase shares of Holding Class A Common Stock (a "Holding Class A
Substitute Option") MUTATIS MUTANDIS. The exercise price and the number of
shares of Holding Class A Common Stock subject to each Holding Class A
Substitute Option shall be identical to the exercise price and the number of
shares of PacifiCare Class A Common Stock subject to the PacifiCare Class A
Option that such Holding Class A Substitute
36
<PAGE>
Option replaces. In compliance with Section 424(a) of the Code, each such
Holding Class A Substitute Option shall be subject to substantially all of the
other terms and conditions of the PacifiCare stock option it replaces.
4.9 INDEMNIFICATION.
(a) With respect to actions, omissions and events occurring through the
Effective Time, all rights to indemnification existing in favor of the current
directors and officers of the Company and PacifiCare as provided in their
respective Certificates of Incorporation and indemnification agreements, each as
in effect as of the date of the Original Agreement, shall survive the Mergers
and shall be observed by Holding, PacifiCare Surviving Corporation and Company
Surviving Corporation.
(b) In addition to and without limiting Section 4.9(a), Holding shall, from
and after the Closing, to the fullest extent permitted under applicable laws,
indemnify, defend and hold harmless the current officers and directors of
PacifiCare and the Company (collectively, the "Indemnified Parties") against all
losses, expenses, claims, damages, liabilities or amounts that are paid in
settlement of (subject to Section 4.9(c)), or otherwise incurred in connection
with, any claim, action, suit, proceeding or investigation by reason of the fact
that such Indemnified Party was a director or officer of PacifiCare or the
Company prior to the Effective Time and arising out of actions, omissions and
events occurring at or prior to the Effective Time or in connection with the
Mergers and the actions taken in connection therewith (a "Claim") and shall pay
expenses in advance of the final disposition of any such Claim to each
Indemnified Party upon receipt from the Indemnified Party to whom expenses are
advanced of an undertaking reasonably satisfactory to Holding to repay such
advances if legally required to do so PROVIDED, HOWEVER, that Holding will not
be liable under this Section 4.9(b) to any Indemnified Party for any action
found by a court of competent jurisdiction to constitute a violation of law, a
breach of fiduciary duty to the Company (or any subsidiary) or wilful
misconduct.
(c) For purposes of Section 4.9(b), in the event any Claim is brought
against any Indemnified Party, Holding will be entitled to participate therein
at its own expense. In such event, the Indemnified Parties shall cooperate with
and provide all information reasonably requested by Holding. Except as otherwise
provided below, Holding may, at its option, assume the defense of any Claim,
with counsel reasonably satisfactory to the Indemnified Party. After notice from
Holding to the Indemnified Party of the election by PacifiCare to assume the
defense thereof, Holding will not be liable to the Indemnified Party under
Section 4.9(b) for any legal or other expenses subsequently incurred by the
Indemnified Party in connection with the defense thereof except for reasonable
costs of investigation or otherwise as provided below. The Indemnified Party
shall have the right to employ separate counsel in connection with such Claim,
but the fees and expenses of such counsel incurred after notice from Holding of
its assumption of the defense thereof shall be at the expense of the Indemnified
Party unless (i) the employment of counsel by the Indemnified Party has been
authorized by Holding, (ii) the Indemnified Party shall have reasonably
concluded that there is, under applicable standards of professional conduct, an
actual conflict between the interests of Holding and the Indemnified Party in
the conduct of the defense of such action or (iii) Holding shall not have
employed counsel to assume the defense of such action, in each of which cases
the reasonable fees and expenses of the Indemnified Party's separate counsel
shall be at the expense of Holding. In any case where the expense of defending a
Claim is to be borne by Holding, the Indemnified Parties as a group shall be
entitled to no more than one law firm (in addition to local counsel) to
represent them with respect to such Claim unless there is, under applicable
standards of professional conduct (as reasonably determined by counsel to the
Indemnified Parties), an actual conflict between the interests of any two or
more Indemnified Parties, in which event such additional counsel as may be
required by reason of such conflict may be retained by the Indemnified Parties.
Holding shall not be liable to indemnify the Indemnified Party under Section
4.9(b) for any amounts paid in any settlement of any Claim if such settlement is
effected without Holding's written consent. Holding shall be permitted to settle
any Claim, except that Holding shall not settle any Claim
37
<PAGE>
in any manner which would impose any non-monetary penalty or material limitation
(or any monetary penalty with respect to which the Indemnified Party is not
entitled to indemnification pursuant to Section 4.9(b)) on the Indemnified Party
without the Indemnified Party's consent.
Any Indemnified Party wishing to claim indemnification under Section 4.9
upon learning of any such Claim shall promptly notify Holding (although the
failure so to notify Holding shall not relieve Holding from any liability that
Holding may have under Section 4.9, except to the extent such failure materially
prejudices Holding's position with respect to such Claim), and shall deliver to
Holding the undertaking specified in Section 4.9(b) above.
(d) Holding shall maintain in effect for a period of not less than five
years from the Effective Time the current policy of directors' and officers'
liability insurance maintained by PacifiCare and the Company, as the case may
be, with respect to matters occurring prior to the Effective Time; PROVIDED,
HOWEVER, that (i) Holding may substitute therefor policies of comparable
coverage (with carriers comparable to PacifiCare's and the Company's existing
carriers) and (ii) Holding shall not be required to pay an annual premium for
such insurance in excess of two hundred percent (200%) of the last annual
premium paid by PacifiCare or the Company, as the case may be, for such
insurance prior to the date of this Agreement (the "200% Amount"). In the event
the annual premium for such insurance exceeds the 200% Amount, Holding shall be
entitled to reduce the amount of coverage of such insurance to the amount of
coverage that can be obtained for a premium equal to the 200% Amount.
(e) In the event Holding or any of its successors or assigns (i)
consolidates with or merges into any other Person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger,
or (ii) transfers or conveys all or substantially all of its properties and
assets to any Person, then, and in each such case, to the extent necessary to
effectuate the purposes of this Section 4.9, proper provision shall be made so
that the successors and assigns of Holding assume the obligations set forth in
this Section 4.9 and none of the actions described in clause (i) or (ii) shall
be taken until such provision is made.
4.10 ADDITIONAL AGREEMENTS.
(a) Subject to Section 4.10(b), Holding, PacifiCare and the Company agree
to use all commercially reasonable efforts to take, or cause to be taken, all
actions necessary to consummate the Mergers and make effective the other
transactions contemplated by this Agreement. Without limiting the generality of
the foregoing, but subject to Section 4.10(b), Holding, PacifiCare and the
Company shall use all commercially reasonable efforts to (i) obtain the consent
and approval of each Governmental Authority, lessor or other person whose
consent or approval is required (by virtue of any contractual provision or legal
requirement or otherwise) in order to permit the consummation of the Merger or
any of the other transactions contemplated by this Agreement or in order to
enable Holding, PacifiCare Surviving Corporation and Company Surviving
Corporation to conduct their respective businesses in the manner in which such
business is currently being conducted or is proposed to be conducted, (ii)
effect all registrations and filings necessary to consummate the Mergers and
(iii) lift any restraint, injunction or other legal bar to the Mergers.
(b) Notwithstanding anything to the contrary contained in Section 4.10(a)
or elsewhere in this Agreement, (i) Holding shall not have any obligation under
this Agreement to dispose or cause any of its subsidiaries to dispose of any
material assets, (ii) Holding shall not have any obligation to make any changes
to its operations or proposed operations or to the operations or proposed
operations of any of its subsidiaries and (iii) Holding shall not have any
obligation to make any commitment (to any Governmental Authority or otherwise)
regarding its future operations, or the future operations of any of its
subsidiaries, or the future operations of PacifiCare Surviving Corporation or
the Company Surviving Corporation or any of their respective Material
Subsidiaries which would, in each of case (ii) and (iii) above, have a material
adverse effect thereon (even though the disposition of such assets or the making
of such change or commitment might facilitate the obtaining of a required
approval from a Governmental Authority or might otherwise facilitate the
consummation of the Mergers).
38
<PAGE>
4.11 DISCLOSURE. PacifiCare and the Company will (i) mutually agree on the
text of any press release and (ii) consult with each other before making any
other public statement with respect to this Agreement and the transactions
contemplated by this Agreement, except, in each such case, as may be required by
applicable law (including disclosure requirements) or any listing or similar
agreement with any national securities exchange or the Nasdaq National Market.
4.12 AFFILIATE AGREEMENTS. The Company shall deliver to PacifiCare, within
ten days after the date of this Agreement, a letter from the Company identifying
all persons who may be "affiliates" of the Company as that term is used in
paragraphs (c) and (d) of Rule 145 under the Securities Act ("Company
Affiliates"). The Company shall use all commercially reasonable efforts to cause
each person who is or becomes a Company Affiliate to execute and deliver to
PacifiCare, on or prior to the date of the mailing of the Prospectus/Proxy
Statement, an Affiliate Agreement in the form attached hereto as Exhibit 4.12.
PacifiCare shall use all commercially reasonable efforts to cause each person
who is or becomes an affiliate of PacifiCare to execute and deliver a similar
agreement on or prior to such date.
4.13 TAX QUALIFICATION AND OPINION BACK-UP CERTIFICATES. Each of Holding,
the Company and PacifiCare will use its reasonable best efforts to cause the
transactions contemplated by this Agreement, other than the transactions with
respect to Talbert contemplated by Section 4.15 hereof, to qualify as transfers
subject to the provisions of Section 351(a) of the Code and to deliver, in
connection with the tax opinions referred to in Sections 5.9 and 6.8,
certificates of representation reasonable under the circumstances ("Tax
Certificates").
4.14 FINANCING. PacifiCare has received from Bank of America NT&SA a
commitment letter dated August 2, 1996 (the "Commitment Letter") containing its
commitment, subject to the terms and conditions thereof, to provide sufficient
financing to permit PacifiCare and Holding to consummate the transactions
contemplated hereby. A true and accurate copy of the Commitment Letter has been
provided to the Company. PacifiCare and Holding shall enter into the definitive
credit agreements contemplated by the Commitment Letter (or any revised
commitment letter more favorable to PacifiCare and Holding) prior to the date on
which the Proxy/Prospectus is mailed to the Company's Stockholders.
4.15 TALBERT.
(a) The Company shall negotiate a written agreement with Talbert under
which all Talbert contracted medical providers or sites agree to provide
professional services to members of HMOs and enrollees in insurance products of
the Company and Company Surviving Corporation and their subsidiaries in exchange
for a current market rate capitation payment ("Capitated Contract"). The
Capitated Contract shall be subject to the review and approval of PacifiCare
prior to execution. In addition to the Capitated Contract, the Company and
Talbert shall enter into an agreement for the Company to render administrative
services (information systems, payroll, accounts payable, employee benefits
administration and the like) for a period not to exceed one year following the
Effective Date at a rate and on other terms approved by PacifiCare. PacifiCare
shall negotiate in good faith with the Company and Talbert in determining
whether to give its approval.
(b) Following execution of the Capitated Contract, the Company shall
capitalize Talbert to increase its net worth to approximately $60,000,000
("Capital Contribution"); provided, however, that in all events the net worth of
Talbert shall be equal to the proceeds of the rights offering referred to in
Section 4.15(c) below, assuming all such rights are exercised.
(c) Following the Capital Contribution, simultaneous with consummation of
the Mergers or as soon thereafter as legally permissible, Holding shall cause
the issuance of rights to all holders of Company Common Stock and Company Series
A Preferred Stock outstanding immediately prior to the Effective Time (other
than holders who have perfected appraisal rights in accordance with Section 1.8)
and allocated among them on a Company common share equivalent basis, exercisable
until the first business day on or after the thirtieth day after the date of the
Effective Time and expiring thereafter, to purchase, directly or indirectly
through one or more other corporations formed to
39
<PAGE>
facilitate such purchase all of Company's interest in Talbert. In connection
with the purchase, Holding, PacifiCare, the Company and Talbert shall discuss
the possibility of a Code section 338(h)(10) election in connection with such
purchase; provided however, that no such election shall be made without the
prior written consent of PacifiCare, which consent shall not be withheld unless
there is an adverse impact to PacifiCare.
(d) Before the Effective Time and with the prior consent of PacifiCare as
to significant actions, the Company and Talbert shall take such steps as are
reasonably required to consummate the separation of Talbert from the Company.
The Company and Talbert shall have the right to continue to prosecute the
application now pending before the California Department of Corporations for the
issuance of stock options to employees of Talbert and to carry out transactions
consistent with such application as permitted by Section 4.2(b) if and when a
permit is granted pursuant thereto.
(e) The Company will not assign any of its rights under that certain Stock
Purchase Agreement dated as of March 15, 1996 by and between the Company,
Talbert Medical Management Corporation, Talbert Health Services Corporation and
certain management investors, as amended (the "Talbert Stock Purchase
Agreement"). From and after the Effective Time, Holding will cause the committee
of the Company that makes the determinations required by Section 5.3 of the
Talbert Stock Purchase Agreement to consist of the members of the Compensation
Committee of Holding and one member of the Board of Directors of Talbert,
designated by the Board of Directors of Talbert and reasonably acceptable to the
Board of Directors of Holding.
4.16 7% SENIOR NOTES DUE 2003. Holding shall, if required by applicable
law or the terms of the Company's 7% Senior Notes Due 2003 (the "Senior Notes"),
assume the Senior Notes.
4.17 NOTICES OF CERTAIN EVENTS. Each of Holding, the Company and
PacifiCare shall promptly notify the other of:
(a) any notice or other communication from any Person alleging that the
consent of such Person is or may be required in connection with the transactions
contemplated by this Agreement;
(b) any notice or other communication from any governmental body, agency,
official or authority in connection with the transactions contemplated by this
Agreement that indicates such body, agency, official or authority intends to
take action that would prevent or materially interfere with the transactions
contemplated by this Agreement; and
(c) any actions, suits, claims, investigations, proceedings or health or
insurance related proceedings or market conduct examinations or audits commenced
or, to the best of Company's or PacifiCare's knowledge (as the case may be)
threatened against, relating to or involving or otherwise affecting the Company
or PacifiCare or any of their subsidiaries which, if pending on the date of this
Agreement, would have been required to have been disclosed pursuant to Section
2.7 or 3.7 or which relate to the consummation of the transactions contemplated
by this Agreement.
4.18 CERTAIN CORPORATE MATTERS WITH RESPECT TO PACIFICARE.
(a) PacifiCare shall cause Holding to take all necessary corporate action
for the establishment of the Holding stock option plans contemplated by Section
4.8 hereof and agrees to vote the shares of capital stock of Holding owned by it
in favor of the adoption of such plans as required under the laws of the State
of Delaware.
(b) From the date hereof until the Effective Time, PacifiCare shall cause
Holding (x) not to take any action inconsistent with the provisions of this
Agreement and (y) not to conduct business or activity other than in connection
with this Agreement.
4.19 COMPLIANCE WITH REGULATIONS. PacifiCare and the Company will each use
reasonable commercial efforts, and will cause their subsidiaries to use
reasonable commercial efforts, to comply with applicable rules and regulations
of the Health Care Financing Administration relating to so-called physician
incentive plans.
40
<PAGE>
4.20 ASSUMPTION BY SUCCESSOR. Holding, effective as of the Effective Time,
assumes expressly and agrees to perform the employment agreements described in
Schedule 2.6 of the Company Disclosure Schedule in the same manner and to the
same extent that the Company would be required to perform them.
4.21 NO ACTIVITY BY HOLDING. From the date of the Original Agreement until
the Effective Time, PacifiCare shall not cause or permit Holding, Neptune Sub or
Company Sub to (i) issue any stock or securities or (ii) acquire any property,
incur any liabilities or engage in any business or activity whatsoever, other
than to consummate the Mergers and transactions contemplated hereby (including
the financing thereof) and to carry out its obligations hereunder.
ARTICLE 5
CONDITIONS PRECEDENT TO OBLIGATIONS OF PACIFICARE AND HOLDING
The obligations of PacifiCare and Holding to effect the Mergers and
otherwise consummate the transactions contemplated by this Agreement are subject
to the fulfillment, at or prior to the Closing, of each of the following
conditions:
5.1 REPRESENTATIONS AND WARRANTIES ACCURATE.
(a) The representations and warranties of the Company contained in this
Agreement shall have been accurate in all material respects as of the date of
the Original Agreement.
(b) The representations and warranties of the Company contained in this
Agreement shall be accurate in all respects as of the date of the Closing as if
made on and as of the date of the Closing, except that any inaccuracies in such
representations and warranties will be disregarded if the circumstances giving
rise to such inaccuracies (considered individually and collectively) do not
constitute, and would not reasonably be expected to result in, a Material
Adverse Effect on the Company (it being understood that, for purposes of
determining the accuracy of such representations and warranties, (i) all
Material Adverse Effect qualifications shall be disregarded and (ii) any update
of or modification to the Company Disclosure Schedule made or purported to have
been made after the date of the Original Agreement shall be disregarded).
5.2 COMPLIANCE WITH COVENANTS. The Company shall have complied with and
performed in all material respects each covenant contained in this Agreement
that is required to be performed by the Company on or prior to the date of the
Closing.
5.3 NO MATERIAL ADVERSE EFFECT. Since the date of the Original Agreement,
there shall not have been any Material Adverse Effect on the Company and there
shall not have occurred any change or development, or any combination of changes
or developments, that would reasonably be expected to have a Material Adverse
Effect on the Company.
5.4 CERTIFICATE. The Company shall have delivered to PacifiCare a
certificate of the Chief Executive Officer of the Company evidencing compliance
with the conditions set forth in Sections 5.1, 5.2 and 5.3.
5.5 EFFECTIVENESS OF REGISTRATION STATEMENT. The S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the S-4 Registration Statement.
5.6 STOCKHOLDER APPROVAL. This Agreement, the Mergers and the PacifiCare
Amendment shall have been adopted and approved by the Required Company Vote and
the Required PacifiCare Vote, as applicable.
5.7 AFFILIATES AGREEMENTS. The Affiliates Agreements described in Section
4.12 shall have been executed by each party therein described and delivered to
PacifiCare.
41
<PAGE>
5.8 LEGAL OPINION. PacifiCare shall have received an opinion of Sheppard,
Mullin, Richter & Hampton LLP, counsel to the Company, dated as of the date of
the Closing, in such form as shall be reasonably acceptable to PacifiCare and
its counsel.
5.9 TAX OPINION. Subject to receipt by PacifiCare's counsel of the Tax
Certificates, PacifiCare shall have received a written opinion from PacifiCare's
counsel, dated as of the date of the Closing (reasonably satisfactory in form
and substance to PacifiCare), to the effect that neither PacifiCare nor any of
its stockholders will recognize gain or loss for United States federal income
tax purposes as a result of the PacifiCare merger. For purposes of rendering
such opinion, PacifiCare's counsel shall be entitled to rely upon the Tax
Certificates.
5.10 ABSENCE OF RESTRAINT. No order to restrain, enjoin or otherwise
prevent the consummation of either of the Mergers shall have been entered by any
court or Governmental Authority.
5.11 NO GOVERNMENTAL LITIGATION. There shall not be pending or threatened
any Proceeding in which a Governmental Authority is or is threatened to become a
party: (a) challenging or seeking to restrain or prohibit the consummation of
either of the Mergers; (b) relating to either of the Mergers and seeking to
obtain from Holding or PacifiCare or any of their subsidiaries any damages that
may be material to Holding or PacifiCare; (c) seeking to prohibit or limit in
any material respect Holding's ability to vote, receive dividends with respect
to or otherwise exercise ownership rights with respect to the stock of
PacifiCare Surviving Corporation or Company Surviving Corporation (PacifiCare
Surviving Corporation and Company Surviving Corporation being sometimes referred
to below as "Surviving Corporations"); or (d) which would materially and
adversely affect the right of Holding, the Surviving Corporations or any
subsidiary thereof to own the assets or operate the business of PacifiCare, the
Company or any of their subsidiaries.
5.12 NO OTHER LITIGATION. There shall not be pending any Proceeding in
which there is a reasonable possibility of an outcome that would have a Material
Adverse Effect on Holding, PacifiCare or the Company: (a) challenging or seeking
to restrain or prohibit the consummation of either of the Mergers; (b) relating
to either of the Mergers and seeking to obtain from Holding or PacifiCare or any
of its subsidiaries any damages that may be material to Holding or PacifiCare;
(c) seeking to prohibit or limit in any material respect Holding's ability to
vote, receive dividends with respect to or otherwise exercise ownership rights
with respect to the stock of the Surviving Corporations; or (d) which would
affect adversely the right of Holding, the Surviving Corporations or any of
their subsidiaries to own the assets or operate the business of PacifiCare, the
Company or any of their subsidiaries.
5.13 HSR ACT. The waiting periods applicable to the consummation of the
Mergers, and the acquisitions of voting securities of Holding by the
stockholders of Company and PacifiCare, if any, under the HSR Act shall have
expired or been terminated.
5.14 QUOTATION ON NASDAQ NATIONAL MARKET OR NEW YORK STOCK EXCHANGE. The
Holding Class A Common Stock, Holding Class B Common Stock and, if applicable,
Holding Series A issuable in the Mergers shall have been approved for quotation
on the Nasdaq National Market or listing on the NYSE upon official notice of
issuance thereof.
5.15 OTHER REQUIRED CONSENTS AND APPROVALS. Holding, PacifiCare and the
Company shall have received all material approvals, licenses, consents,
assignments and authorizations of Governmental Authorities and other persons,
including those set forth on the Company Disclosure Schedule, as may be required
(a) to permit the performance by Holding, PacifiCare and the Company of their
respective obligations under this Agreement and the consummation of the Mergers
and (b) to permit Holding and the Surviving Corporations and their respective
subsidiaries to conduct their business and operations in the manner currently
conducted.
5.16 TAKECARE BOARD REPRESENTATION. The rights of certain former
stockholders of TakeCare to board representation on the Board of Directors of
the Company shall have been terminated.
42
<PAGE>
5.17 RESTATED RIGHTS PLAN. The Restated Rights Plan shall have been
amended to provide that the transactions contemplated by this Agreement do not
give rise to any rights or benefits under the Restated Rights Plan.
5.18 TALBERT. The net worth of Talbert shall not exceed $60,000,000.
ARTICLE 6
CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS
The obligations of the Company to effect the Company Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
fulfillment, at or prior to the Closing, of the following conditions:
6.1 REPRESENTATIONS AND WARRANTIES ACCURATE.
(a) The representations and warranties of PacifiCare contained in this
Agreement shall have been accurate in all material respects as of the date of
the Original Agreement.
(b) The representations and warranties of PacifiCare contained in this
Agreement shall be accurate in all respects as of the date of the Closing as if
made on and as of the date of the Closing, except that any inaccuracies in such
representations and warranties will be disregarded if the circumstances giving
rise to such inaccuracies (considered individually and collectively) do not
constitute, and would not reasonably be expected to result in, a Material
Adverse Effect on PacifiCare (it being understood that, for purposes of
determining the accuracy of such representations and warranties as of the date
of the Closing, (i) all Material Adverse Effect qualifications shall be
disregarded and (ii) any update of or modification to the PacifiCare Disclosure
Schedule made or purported to have been made after the date of this Agreement
shall be disregarded).
6.2 COMPLIANCE WITH COVENANTS. PacifiCare shall have complied with and
performed in all material respects each covenant contained in this Agreement
that is required to be performed by PacifiCare on or prior to the date of the
Closing.
6.3 NO MATERIAL ADVERSE EFFECT. Since the date of the Original Agreement,
there shall not have been any Material Adverse Effect on PacifiCare, and there
shall not have occurred any change or development, or any combination of changes
or developments, that would reasonably be expected to have a Material Adverse
Effect on PacifiCare.
6.4 CERTIFICATE. PacifiCare shall have delivered to the Company a
certificate of an executive officer of PacifiCare evidencing compliance with the
conditions set forth in Sections 6.1, 6.2 and 6.3.
6.5 EFFECTIVENESS OF REGISTRATION STATEMENT. The S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the S-4 Registration Statement.
6.6 STOCKHOLDER APPROVAL. This Agreement, the Mergers and the PacifiCare
Amendment shall have been adopted and approved by the Required Company Vote and
the Required PacifiCare Vote, as applicable.
6.7 LEGAL OPINION. The Company shall have received an opinion of Cooley
Godward Castro Huddleson & Tatum, counsel to PacifiCare, dated as of the date of
the Closing, in such form as shall be reasonably acceptable to the Company and
its counsel.
6.8 TAX OPINION. Subject to receipt by the Company's counsel of the Tax
Certificates, the Company shall have received a written opinion from the
Company's counsel dated as of the date of the Closing to the effect that the
Company Merger will constitute a contribution of Company Common Stock and
Company Series A Preferred Stock to Holding in exchange for Holding capital
stock as part of a transaction governed by Section 351 of the Code. For purposes
of rendering such opinion, the Company's counsel shall be entitled to rely upon
the Tax Certificates.
43
<PAGE>
6.9 ABSENCE OF RESTRAINT. No order to restrain, enjoin or otherwise
prevent the consummation of either of the Mergers shall have been entered by any
court or Governmental Authority.
6.10 NO GOVERNMENTAL LITIGATION. There shall not be pending or threatened
any Proceeding in which a Governmental Authority is or is threatened to become a
party: (a) challenging or seeking to restrain or prohibit the consummation of
either of the Mergers; (b) relating to either of the Mergers and seeking to
obtain from the Company or any of its subsidiaries any damages that may be
material to the Company (c) seeking to prohibit or limit in any material respect
Holding's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of the Surviving
Corporations; or (d) which would materially and adversely affect the right of
Holding, the Surviving Corporations or any subsidiary thereof to own the assets
or operate the business of PacifiCare or the Company or any of their
subsidiaries.
6.11 HSR ACT. The waiting period applicable to the consummation of the
Mergers under the HSR Act shall have expired or been terminated.
6.12 QUOTATION ON NASDAQ NATIONAL MARKET OR NEW YORK STOCK EXCHANGE. The
Holding Class A Common Stock, Holding Class B Common Stock and, if applicable,
Holding Series A issuable in the Mergers shall have been approved for quotation
on the Nasdaq National Market or listing on the NYSE upon official notice of
issuance thereof.
ARTICLE 7
TERMINATION OF AGREEMENT
7.1 TERMINATION. This Agreement may be terminated prior to the Closing
Date, whether before or after approval of the Mergers by the stockholders of the
Company and PacifiCare:
(a) by mutual written consent of the respective Boards of Directors of
PacifiCare and the Company;
(b) by either PacifiCare or the Company if either of the Mergers shall not
have been consummated by April 30, 1997 (unless the failure to consummate such
Merger is attributable to a failure on the part of the party seeking to
terminate this Agreement to perform any material obligation required to be
performed by such party at or prior to the Effective Time);
(c) by either PacifiCare or the Company if a court of competent
jurisdiction or Governmental Authority shall have issued a final and
nonappealable order, decree or ruling, or shall have taken any other action,
having the effect of permanently restraining, enjoining or otherwise prohibiting
either of the Mergers;
(d) by either PacifiCare or the Company if (i) the Company Stockholders'
Meeting shall have been held and (ii) this Agreement and the Company Merger
shall not have been adopted and approved at such meeting by the Company Required
Vote;
(e) by PacifiCare (at any time prior to the adoption and approval of this
Agreement and the Company Merger by stockholders of the Company by the Company
Required Vote) if a Triggering Event (as defined below) shall have occurred;
(f) by either PacifiCare or the Company if (i) the PacifiCare Stockholders'
Meeting shall have been held and (ii) this Agreement, the PacifiCare Merger and
any related matters shall not have been adopted and approved at such meeting by
the Required PacifiCare Vote;
(g) by PacifiCare if any of the Company's representations and warranties
contained in this Agreement shall be or shall have become materially inaccurate
as of the date of the Original Agreement, or if any of the Company's covenants
contained in this Agreement shall have been breached in any material respect;
PROVIDED, HOWEVER, that if an inaccuracy in the Company's representations and
warranties or a breach of a covenant by the Company is curable by the Company
and the Company is
44
<PAGE>
continuing to exercise all commercially reasonable efforts to cure such
inaccuracy or breach, then PacifiCare may not terminate this Agreement under
this Section 7.1(g) on account of such inaccuracy or breach; or
(h) by the Company if any of PacifiCare's or Holding's representations and
warranties contained in this Agreement shall be or shall have become materially
inaccurate as of the date of the Original Agreement, or if any of PacifiCare's
or Holding's covenants contained in this Agreement shall have been breached in
any material respect; PROVIDED, HOWEVER, that if an inaccuracy in PacifiCare's
or Holding's representations and warranties or a breach of a covenant by
PacifiCare or Holding is curable by PacifiCare or Holding and PacifiCare or
Holding is continuing to exercise all commercially reasonable efforts to cure
such inaccuracy or breach, then the Company may not terminate this Agreement
under this Section 7.1(h) on account of such inaccuracy or breach.
A "Triggering Event" shall be deemed to have occurred if (i) the Board of
Directors of the Company shall have failed to recommend, shall for any reason
have withdrawn or shall have amended or modified in a manner adverse to
PacifiCare its unanimous recommendation in favor of the Company Merger or
approval or adoption of this Agreement, or the Company shall have failed to
include in the Prospectus/Proxy Statement the unanimous recommendation of the
Board of Directors of the Company in favor of the Company Merger and approval
and adoption of this Agreement and related matters; (ii) the Board of Directors
of the Company shall have approved, endorsed or recommended any Acquisition
Proposal; (iii) the Company shall have entered into any letter of intent,
contract or other instrument related directly or indirectly to any Acquisition
Proposal (other than a nondisclosure agreement entered into in accordance with
Section 4.4(c) or contracts with advisors or consultants); or (iv) the Company
shall have failed to hold the Company Stockholders' Meeting within 60 days after
the S-4 Registration Statement is declared effective and any Acquisition
Proposal shall have been made during such 60-day period.
"Acquisition Proposal" shall mean any proposal (other than any proposal by
PacifiCare or Neptune Sub or in connection with the transactions contemplated in
Section 4.15 regarding Talbert) regarding (i) any merger, consolidation, share
exchange, business combination or other similar transaction or series of related
transactions involving the Company; (ii) any sale, lease, exchange, transfer or
other disposition of the assets of the Company or any subsidiary of the Company
constituting more than 50% of the consolidated assets of the Company or
accounting for more than 50% of the consolidated revenues of the Company in any
one transaction or in a series of related transactions; and (iii) any offer to
purchase, tender offer, exchange offer or any similar transaction or series of
related transactions made by any Person involving more than 50% of the
outstanding shares of the capital stock of the Company or the filing of any
Statement on Schedule 14D-1 with the SEC in connection therewith.
7.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement as provided in Section 7.1, this Agreement shall be of no further
force or effect; PROVIDED, HOWEVER, that (i) this Section 7.2, Section 7.3 and
Article 8 shall survive the termination of this Agreement and shall remain in
full force and effect, (ii) such termination shall have no effect on the
Confidentiality Agreement dated July 22, 1996 between PacifiCare and the Company
which shall remain in full force and effect and, (iii) subject to Section 7.3(b)
and 7.3(c) below, the termination of this Agreement shall not relieve any party
from any liability for any breach of this Agreement.
7.3 FEES AND EXPENSES.
(a) Except as set forth in this Section 7.3, all fees and expenses incurred
in connection with this Agreement and the transactions contemplated by this
Agreement shall be paid by the party incurring such expenses, whether or not the
Mergers are consummated.
(b) In consideration of the substantial time, expense and forgoing of other
opportunities that PacifiCare and Holding have invested in the transactions
contemplated hereby:
45
<PAGE>
(i) If this Agreement is terminated pursuant to Section 7.1(d) at any
time after the occurrence of a Triggering Event or if this Agreement is
terminated by PacifiCare pursuant to Section 7.1(e), then the Company shall
pay to PacifiCare a fee, in immediately available funds, of $50,000,000 (the
"Termination Amount"). In the case of termination of this Agreement by the
Company pursuant to Section 7.1(d), the Termination Amount shall be paid
prior to such termination, and in the case of termination of this Agreement
pursuant to Section 7.1(e) or by PacifiCare pursuant to Section 7.1(d), the
Termination Amount shall be paid within one business day of such
termination. If the Company fails to pay such fee by the date provided
herein, in addition to any other remedies that may be available to
PacifiCare for such breach by the Company, said fee shall bear interest at
the lower of 10% per annum and the maximum rate allowable by law from the
date such payment was due until the date such fee is actually paid.
(ii) If this Agreement is terminated pursuant to Section 7.1(d) (and
Section 7.3(b)(i) is not applicable) and within 12 months of the date of the
Company Stockholders' Meeting the Company enters into an agreement relating
to an Acquisition Proposal, the Company shall pay to PacifiCare, within one
business day of entering into such agreement, a fee in immediately available
funds, of the Termination Amount. If the Company fails to pay such fee by
the date provided herein, in addition to any other remedies that may be
available to PacifiCare for such breach by the Company, said fee shall bear
interest at the lower of 10% per annum and the maximum rate allowable by law
from the date such payment was due until the date such fee is actually paid.
(c) In consideration of the substantial time, expense and forgoing of other
opportunities that the Company has invested in the transactions contemplated
hereby if this Agreement is terminated pursuant to Section 7.1(f) or if the
Mergers are not consummated solely by reason of a breach by PacifiCare caused by
its failure to enter into definitive agreements related to the financing
contemplated by the Commitment Letter, or the termination of such agreements or
the failure of PacifiCare to receive the funding contemplated by the Commitment
Letter, and after diligent efforts to find commercially reasonable alternative
financing (a "Financing Breach"), then PacifiCare shall pay the Company a fee,
in immediately available funds, of $50,000,000, in the case of a termination
pursuant to Section 7.1(f) or $100,000,000 in the case of a Financing Breach. In
the case of a termination by PacifiCare pursuant to Section 7.1(f), the
Termination Amount shall be paid upon termination. In the case of a termination
by the Company pursuant to Section 7.1(f) or the failure to consummate the
transactions contemplated hereby solely because of a Financing Breach,
PacifiCare shall pay the Termination Amount promptly following such event.
If PacifiCare fails to pay such fee by the date provided, in addition to
such other remedies as may be available to the Company for such breach by
PacifiCare, said fee shall bear interest on such fee at the lower of 10% per
annum and the maximum rate allowable by law from the date such fee was due until
the date it was actually paid.
(d) Each of PacifiCare and the Company acknowledge that the fees payable
pursuant to Sections 7.3(b) and 7.3(c) (and, if applicable, any interest thereon
and attorneys' fees and costs related to any suit to enforce such provisions)
are the sole remedies of such parties for termination or failure to consummate
the Mergers under the circumstances described in such sections (other than any
willful breach of any agreement or covenant set forth in this Agreement).
ARTICLE 8
MISCELLANEOUS
8.1 AMENDMENT. This Agreement may be amended with the approval of the
respective Boards of Directors of Holding, the Company and PacifiCare at any
time before or after approval of this Agreement by the stockholders of the
Company and the stockholders of PacifiCare; PROVIDED, HOWEVER, that after any
such stockholder approval, no amendment shall be made which would have a
material
46
<PAGE>
adverse effect on the stockholders of the Company or the stockholders of
PacifiCare without the further approval of such stockholders. This Agreement may
not be amended except by an instrument in writing signed on behalf of each of
the parties hereto.
8.2 WAIVER.
(a) No failure on the part of any party to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any party
in exercising any power, right, privilege or remedy under this Agreement, shall
operate as a waiver of such power, right, privilege or remedy; and no single or
partial exercise of any such power, right, privilege or remedy shall preclude
any other or further exercise thereof or of any other power, right, privilege or
remedy.
(b) No party shall be deemed to have waived any claim arising out of this
Agreement, or any power, right, privilege or remedy under this Agreement, unless
the waiver of such claim, power, right, privilege or remedy is expressly set
forth in a written instrument duly executed and delivered on behalf of such
party; and any such waiver shall not be applicable or have any effect except in
the specific instance in which it is given.
8.3 NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties contained in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the Mergers.
8.4 ENTIRE AGREEMENT; COUNTERPARTS; APPLICABLE LAW. This Agreement and the
other agreements referred to herein and the Confidentiality Agreement dated as
of July 22, 1996 between PacifiCare and the Company constitute the entire
agreement and supersede all prior agreements and understandings, both written
and oral, among or between any of the parties with respect to the subject matter
hereof. This Agreement may be executed in several counterparts, each of which
shall be deemed an original and all of which shall constitute one and the same
instrument, and shall be governed in all respects by the laws of the State of
Delaware without regard to its conflicts of laws principles.
8.5 ATTORNEYS' FEES. In any action at law or suit in equity to enforce
this Agreement or the rights of any of the parties hereunder, the prevailing
party in such action or suit shall be entitled to receive a reasonable sum for
its attorneys' fees and all other reasonable costs and expenses incurred in such
action or suit.
8.6 ASSIGNABILITY. This Agreement shall be binding upon, and shall be
enforceable by and inure solely to the benefit of, the parties hereto and their
respective successors; PROVIDED, HOWEVER, that this Agreement may not be
assigned by any party without the prior written consent of the other parties,
and any attempted assignment without such consent shall be void and of no
effect. Nothing in this Agreement, express or implied, is intended to or shall
confer upon any person except the parties hereto and their respective successors
any right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
8.7 NOTICES. All notices and other communications pursuant to this
Agreement shall be in writing and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized, overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid, to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
To PacifiCare:
PacifiCare Health Systems, Inc.
5995 Plaza Drive
Cypress, California 90630
Attention: President
Telephone: (714) 952-1121
Fax: (714) 220-3725
47
<PAGE>
with a copy to:
Konowiecki & Rank
First Interstate World Center
633 West 5th Street, Suite 3500
Los Angeles, California 90071-2007
Attention: Joseph S. Konowiecki, Esq.
Telephone: (213) 229-0990
Fax: (213) 229-0992
and:
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, California 94306
Attention: Michael R. Jacobson, Esq.
Telephone: (415) 843-5000
Fax: (415) 857-0663
To Holding:
N-T Holdings, Inc.
c/o PacifiCare Health Systems, Inc.
5995 Plaza Drive
Cypress, California 90630
Attention: President
Telephone: (714) 952-1121
Fax: (714) 220-3725
with a copy to:
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, California 94306
Attention: Michael R. Jacobson, Esq.
Telephone: (415) 843-5000
Fax: (415) 857-0663
and:
Konowiecki & Rank
First Interstate World Center
633 West 5th Street, Suite 3500
Los Angeles, California 90071-2007
Attention: Joseph S. Konowiecki, Esq.
Telephone: (213) 229-0990
Fax: (213) 229-0992
48
<PAGE>
To the Company:
FHP International Corporation
3120 West Lake Center Drive
Santa Ana, CA 92704
Attention: President
Telephone: (714) 825-6600
Fax: (714)
with a copy to:
Sheppard, Mullin, Richter & Hampton LLP
333 South Hope Street, 48th Floor
Los Angeles, California 90071
Attention: John D. Hussey, Esq.
Telephone: (213) 620-1780
Fax: (213) 620-1398
To the Company Sub or Neptune Sub:
Tree Acquisition Corp. or Neptune Merger Corp. (as the case may be)
c/o PacifiCare Health Systems, Inc.
5995 Plaza Drive
Cypress, California 90630
Attention: President
Telephone: (714) 952-1121
Fax: (714) 220-3725
with a copy to:
Konowiecki & Rank
First Interstate World Center
633 West 5th Street, Suite 3500
Los Angeles, California 90071-2007
Attention: Joseph S. Konowiecki, Esq.
Telephone: (213) 229-0990
Fax: (213) 229-0992
and
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, California 94306
Attention: Michael R. Jacobson, Esq.
Telephone: (415) 843-5000
Fax: (415) 857-0663
All such notices and other communications shall be deemed to have been received
(a) in the case of personal delivery, on the date of such delivery, (b) in the
case of a telecopy, when the party receiving such telecopy shall have confirmed
receipt of the communication, (c) in the case of delivery by
nationally-recognized, overnight courier, on the business day following dispatch
and (d) in the case of mailing, on the fifth business day following such
mailing.
49
<PAGE>
8.8 COOPERATION. Each of the Company and PacifiCare agrees to cooperate
fully with the other and to execute and deliver such further documents,
certificates, agreements and instruments and to take such other actions as may
be reasonably requested by the other to evidence or reflect the Mergers and to
carry out the intent and purposes of this Agreement.
8.9 CERTAIN TERMS. As used in this Agreement:
(a) the word "person" refers to any (i) individual, (ii) corporation,
partnership, limited liability company or other entity, or (iii) Governmental
Authority; and
(b) the words "include" and "including," and variations thereof, shall not
be deemed to be terms of limitation, but rather shall be deemed to be followed
by the words "without limitation."
(c) representations or warranties made to the "knowledge of" or to the
"knowledge of the Company" or "knowledge of PacifiCare" shall include only
matters that are known or should have been known by the officers of those
corporations.
8.10 TITLES. The titles and captions of the Articles and Sections of this
Agreement are included for convenience of reference only and shall have no
effect on the construction or meaning of this Agreement.
8.11 ARTICLES, SECTIONS AND EXHIBITS. Except as otherwise indicated, all
references in this Agreement to "Articles," "Sections" and "Exhibits" are
intended to refer to Articles and Sections of this Agreement and Exhibits to
this Agreement.
8.12 JURISDICTION. Any suit, action or proceeding seeking to enforce any
provision of, or based on any matter arising out of or in connection with, this
Agreement or the transactions contemplated by this Agreement may be brought
against any of the parties in the United States District Court for the Central
District of California or any state court sitting in Orange County, California,
and each of the parties hereto hereby consents to the exclusive jurisdiction of
such courts (and of the appropriate appellate courts) in any such suit, action
or proceeding and waives any objection to venue laid therein. Process in any
suit, action or proceeding may be served on any party anywhere in the world,
whether within or without the State of California. Without limiting the
generality of the foregoing, each party hereto agrees that service of process
upon such party at the address referred to in Section 8.7, together with written
notice of such service to such party, shall be deemed effective service of
process upon such party.
8.13 COUNTERPARTS; EFFECTIVENESS. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument. This
Agreement shall become effective when each party hereto shall have received
counterparts hereof signed by all of the other parties hereto.
8.14 SCHEDULES. Any disclosure on a PacifiCare Disclosure Schedule or
Company Disclosure Schedule made with respect to an identified Section shall be
deemed to be a disclosure for the purpose of other sections of the applicable
Disclosure Schedule to which such disclosure is applicable on its face.
50
<PAGE>
IN WITNESS WHEREOF, the parties hereby have executed this Amended and
Restated Agreement and Plan of Reorganization as of the date first above
written.
PACIFICARE HEALTH SYSTEMS, INC.
By: /s/ Alan R. Hoops
--------------------------------------
Its: President
N-T HOLDINGS, INC.
By: /s/ Alan R. Hoops
--------------------------------------
Its: President
NEPTUNE MERGER CORP.
By: /s/ Alan R. Hoops
--------------------------------------
Its: President
TREE ACQUISITION CORP.
By: /s/ Alan R. Hoops
--------------------------------------
Its: President
FHP INTERNATIONAL CORPORATION
By: /s/ Westcott W. Price III
--------------------------------------
Its: President
51
<PAGE>
APPENDIX B
DILLON READ & CO. INC.
525 Madison Avenue
New York, New York 10022
212-306-7000
August 30, 1996
The Board of Directors
PacifiCare Health Systems, Inc.
5995 Plaza Drive
Cypress, CA 90630
Gentlemen and Madame:
You have requested our opinion as to the fairness, from a financial point of
view, to PacifiCare Health Systems, Inc. ("PacifiCare") and the holders (the
"PacifiCare Stockholders") of Class A Common Stock and Class B Common Stock of
PacifiCare of the consideration to be paid to the holders (the "Company
Stockholders") of Common Stock and Series A Cumulative Convertible Preferred
Stock of FHP International Corporation (the "Company") in connection with the
proposed merger of Tree Acquisition Corp., a wholly-owned subsidiary of N-T
Holdings, Inc. ("Holdings"), into the Company (the "Company Merger") and the
merger of Neptune Merger Corp., a wholly-owned subsidiary of Holdings, into
PacifiCare (the "PacifiCare Merger" and, together with the Company Merger, the
"Mergers") as fully described in the draft, dated August 30, 1996, of the
Amended and Restated Agreement and Plan of Reorganization (the "Merger
Agreement") delivered to us by you.
The terms of the Mergers are set forth in the Merger Agreement and provide
that (a) in the Company Merger, (i) each share of Common Stock of the Company
outstanding at the effective time of the Merger (the "Effective Time") will be
converted into the right to receive (x) an amount of cash equal to $17.50, (y)
0.058 shares (subject to adjustment in accordance with the Merger Agreement) of
Class A Common Stock of Holdings and (z) 0.201 shares (subject to adjustment in
accordance with the Merger Agreement) of Class B Common Stock of Holdings, (ii)
in the event that the holders of a majority of the outstanding Common Stock of
the Company and the holders of 66 2/3% of the outstanding Series A Cumulative
Convertible Preferred Stock of the Company adopt and approve an amendment to the
Company's Restated and Amended Certificate of Incorporation as provided in the
Merger Agreement (the "Required Vote"), each share of Series A Cumulative
Convertible Preferred Stock of the Company outstanding at the Effective Time
will be converted into (y) an amount of cash equal to $14.113 and (z) one-half
of a share of a series of cumulative convertible preferred stock of Holdings and
(iii) in the event the Required Vote is not received, each share of Series A
Cumulative Convertible Preferred Stock of the Company shall have the "Special
Conversion Rights" described in the Company's Certificate of Designation with
respect to the Series A Cumulative Convertible Preferred Stock and the other
rights described in the Merger Agreement and (b) in the PacifiCare Merger, (i)
each share of Class A Common Stock of PacifiCare outstanding at the Effective
Time will be converted into the right to receive one share of Class A Common
Stock of Holdings and (ii) each share of Class B Common Stock of PacifiCare
outstanding at the Effective Time will be converted into the right to receive
one share of Class B Common Stock of Holdings.
Dillon, Read & Co. Inc. has acted as financial advisor to the Board of
Directors of PacifiCare in connection with the Mergers. In the ordinary course
of business, we have traded the debt and equity securities of PacifiCare and the
Company for our own account and the accounts of our customers and, accordingly,
may at any time hold a long or short position in such securities.
In arriving at our opinion, we have (i) reviewed the Amended and Restated
Agreement and Plan of Reorganization and the Amended and Restated Certificate of
Incorporation, (ii) reviewed certain business and historical financial
information relating to PacifiCare and the Company, (iii) reviewed
<PAGE>
certain financial forecasts and other data provided to us by PacifiCare and the
Company relating to the business and prospects of PacifiCare and the Company,
(iv) conducted discussion with members of senior management of PacifiCare and
the Company with respect to, among other things, the business and prospects of
PacifiCare and the Company, (v) reviewed the historical market trading prices
and volumes of the Common Stock of the Company, (vi) reviewed publicly available
financial and stock market data with respect to certain other companies in lines
of business that we believe to be generally comparable to those of the Company,
(vii) compared the proposed financial terms of the Mergers with the financial
terms of certain other merger and acquisitions which we believe to be generally
comparable to the Mergers, (viii) considered the pro forma financial effects of
the Mergers on Holdings and (ix) conducted such other financial studies,
analyses and investigations, and considered such other information, as we deemed
relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have, with your
consent, relied on its being complete and accurate in all material aspects. In
addition, we have not made any independent evaluation or appraisal of any of the
assets or liabilities (contingent or otherwise) of PacifiCare or the Company or
any of their subsidiaries, nor have we been furnished with any such evaluation
or appraisal. With respect to the financial forecasts referred to above, we have
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the respective management of
PacifiCare and the Company as to the future financial performance of their
respective companies. Further, our opinion is based on economic, monetary and
market conditions existing on the date hereof.
Based upon and subject to the foregoing, we are of the opinion, as of the
date hereof, that the consideration to be paid to the Company Stockholders in
the Mergers is fair to PacifiCare and the PacifiCare Stockholders from a
financial point of view.
Very truly yours,
DILLON, READ & CO. INC.
<PAGE>
APPENDIX C
[Merrill Lynch Logo] Investment Banking
Corporate and Institutional
Client Group
World Financial Center
North Tower
New York, NY 10281-1330
As of August 4, 1996
Board of Directors
FHP International Corporation
9900 Talbert Avenue
P.O. Box 8000
Fountain Valley, CA 92728-8000
Gentlemen:
FHP International Corporation ("FHP"), PacifiCare Health Systems, Inc.
("PacifiCare"), N-T Holdings, Inc. ("Holding"), a newly formed corporation, and
two wholly owned subsidiaries of Holding ("FHP Sub" and "Neptune Sub",
respectively) have entered into an Agreement and Plan of Reorganization, dated
as of August 4, 1996 (the "Reorganization Agreement"), pursuant to which FHP Sub
will be merged into FHP and Neptune Sub will be merged into PacifiCare
(collectively, the "Mergers") with the result that FHP and PacifiCare will
become wholly owned subsidiaries of Holding. In the Mergers, (i) each
outstanding share of Class A Common Stock, par value $.01 per share, of
PacifiCare not owned directly or indirectly by PacifiCare or FHP will be
converted into the right to receive one share of Class A Common Stock of Holding
("Holding Class A Common Stock") and each outstanding share of Class B Common
Stock, par value $.01 per share, of PacifiCare not owned directly or indirectly
by PacifiCare or FHP will be converted into the right to receive one share of
Class B Common Stock of Holding ("Holding Class B Common Stock") and (ii) each
outstanding share of FHP's common stock, par value $0.05 per share (the "FHP
Common Stock"), not owned directly or indirectly by PacifiCare or FHP will be
converted into the right to receive (A) $17.50 in cash, (B) a portion of the
2.35 million newly issued shares of Holding Class A Common Stock to be issued on
a pro rata basis to holders of the FHP Common Stock, (C) such portion of a share
of Holding Class B Common Stock as is necessary to represent, together with the
value of Holding Class A Common Stock received under clause (B) above (assuming
per share values of $67 for the Holding Class A Common Stock and $68 for the
Holding Class B Common Stock), $17.50 in value, subject to adjustment based on
subsequent trading prices as provided in the Reorganization Agreement and (D) a
portion of the rights (the "Talbert Rights") to acquire the common stock of
Talbert Medical Management Corp. held by FHP to be issued pro rata to holders of
the FHP Common Stock and to holders of FHP's Series A Cumulative Convertible
Preferred Stock, par value $0.05 per share (the "FHP Preferred Stock"), based on
the number of FHP Common Stock into which such FHP Preferred Stock are
convertible.
In the Mergers, each outstanding share of FHP Preferred Stock not owned
directly or indirectly by PacifiCare or FHP and not converted pursuant to
conversion rights described in the certificate of designation with respect to
the FHP Preferred Stock will be converted into (in addition to the right to
receive the Rights allocable to such FHP Preferred Stock) the right to receive
(i) $14.113 in cash and (ii) one-half share of a new class of cumulative
convertible preferred stock of Holding (the "Holding Preferred Stock") having
the terms set forth in Article IV.C of the Amended and Restated Certificate of
Incorporation of Holding, which is included as Exhibit 1.4A to the
Reorganization Agreement (the "Amended and Restated Holding Certificate of
Incorporation").
1
<PAGE>
You have asked us whether, in our opinion, the proposed consideration to be
received by the holders of the FHP Common Stock and the FHP Preferred Stock
(other than, in each case, PacifiCare and its subsidiaries) in the Mergers is
fair to such shareholders from a financial point of view.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed FHP's Annual Reports, Forms 10-K and related financial
information for the five fiscal years ended June 30, 1995 and FHP's Forms
10-Q and the related unaudited financial information for the quarterly
periods ending September 30, 1995, December 31, 1995 and March 31, 1996;
(2) Reviewed PacifiCare's Annual Reports, Forms 10-K and related financial
information for the five fiscal years ended September 30, 1995 and
PacifiCare's Forms 10-Q and the related unaudited financial information
for the quarterly periods ending December 31, 1995 and March 31, 1996;
(3) Reviewed certain information, including financial forecasts, relating to
the business, earnings, cash flow, assets and prospects of FHP and
PacifiCare, furnished to us by FHP and PacifiCare;
(4) Conducted discussions with members of senior management of FHP and
PacifiCare concerning their respective businesses and prospects and
estimated synergies resulting from the Mergers;
(5) Reviewed the historical market prices and trading activity for the FHP
Common Stock and the shares of Common Stock of PacifiCare and compared
them with that of certain publicly traded companies which we deemed to be
reasonably similar to FHP and PacifiCare, respectively;
(6) Compared the results of operations of FHP and PacifiCare with that of
certain companies which we deemed to be reasonably similar to FHP and
PacifiCare, respectively;
(7) Compared the proposed financial terms of the transactions contemplated
by the Reorganization Agreement with the financial terms of certain other
mergers and acquisitions which we deemed to be relevant;
(8) Reviewed the Reorganization Agreement;
(9) Reviewed a draft (dated July 31, 1996) of Article IV.C of the proposed
Amended and Restated Holding Certificate of Incorporation;
(10) Considered certain pro forma financial effects of the Mergers; and
(11) Reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as we
deemed necessary including our assessment of general economic, market and
monetary conditions.
In preparing our opinion, we have relied on the accuracy and completeness of
all information supplied or otherwise made available to us by FHP and
PacifiCare, and we have not independently verified such information or
undertaken an independent appraisal of the assets or liabilities of FHP or
PacifiCare. We have evaluated FHP on a consolidated basis and have not performed
a separate valuation analysis of Talbert Medical Management Corp. on a
stand-alone basis or attributed any value to the Rights. With respect to the
financial forecasts furnished by FHP and PacifiCare, we have assumed that they
have been reasonably prepared and reflect the best currently available estimates
and judgment of FHP's or PacifiCare's management as to the expected future
financial performance of FHP or PacifiCare, as the case may be. We have, with
your approval, assumed that the Mergers will qualify as transactions under
Section 351(a) of the Internal Revenue Code of 1986, as amended. Our
2
<PAGE>
opinion is necessarily based on market, economic and other conditions as they
exist on the date hereof. In addition, we express no opinion as to prices at
which Holding Class A Common Stock, Holding Class B Common Stock or Holding
Preferred Stock will trade following consummation of the Mergers.
We have acted as financial advisor to FHP in connection with the Mergers and
will receive a fee for our services, payment of a significant portion of which
is contingent upon consummation of the Mergers. We have, in the past, provided
financial advisory and financing services to FHP and have received fees for the
rendering of such services. In addition, in the ordinary course of our business,
we may actively trade securities of FHP, PacifiCare and Holding for our own
account and for the accounts of our customers and, accordingly, we may from time
to time hold long or short positions in such securities.
It is understood that this letter is for the information of the Board of
Directors of FHP and may not be relied upon or used for any other purpose
without our prior written consent; provided, however, that this letter may be
reproduced in full in the proxy statement/prospectus to be mailed to FHP's
shareholders in connection with the Mergers. This letter does not constitute a
recommendation to any shareholder as to how such shareholder should vote with
respect to the Mergers.
On the basis of, and subject to the foregoing, we are of the opinion that
the proposed consideration to be received by the holders of the FHP Common Stock
and FHP Preferred Stock other than PacifiCare and its subsidiaries pursuant to
the Mergers is fair to such shareholders from a financial point of view.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
3
<PAGE>
APPENDIX D
SECTION 262
DELAWARE GENERAL CORPORATION LAW
APPRAISAL RIGHTS
262 APPRAISAL RIGHTS. (a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to Section228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to Section251 (other than a merger effected pursuant to
subsection (g) of Section251), Section252, Section254, Section257,
Section258, Section263 or Section264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date
fixed to determine the stockholders entitled to receive notice of and to
vote at the meeting of stockholders to act upon the agreement of merger
or consolidation, were either (i) listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or (ii) held of record by more than 2,000 holders; and
further provided that no appraisal rights shall be available for any
shares of stock of the constituent corporation surviving a merger if the
merger did not require for its approval the vote of the stockholders of
the surviving corporation as provided in SUBSECTION (F) of Section251 of
this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of any class
or series of stock of a constituent corporation if the holders thereof
are required by the terms of an agreement of merger or consolidation
pursuant to SectionSection251, 252, 254, 257, 258, 263 and 264 of this
title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock or depository
receipts at the effective date of the merger or consolidation will be
either listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by
the National Association of Securities Dealers, Inc. or held of
record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
1
<PAGE>
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and c. of
this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under 253 of this title is not
owned by the parent corporation immediately prior to the merger,
appraisal rights shall be available for the shares of the subsidiary
Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the
assets of the corporation. If the certificate of incorporation contains such
a provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares.
Such demand will be sufficient if it reasonably informs the corporation
of the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of his shares. A proxy or vote against
the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of
such merger or consolidation, the surviving or resulting corporation
shall notify each stockholder of each constituent corporation who has
complied with this subsection and has not voted in favor of or consented
to the merger or consolidation of the date that the merger or
consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to
Section228 or Section253 of this title, each constituent corporation,
either before the effective date of the merger or consolidation or within
ten days thereafter, shall notify each of the holders of any class or
series of stock of such constituent corporation that are entitled to
appraisal rights of the approval of the merger or consolidation and that
appraisal rights are available for any or all shares of such class or
series of stock of such constituent corporation, and shall include in
such notice a copy of this section; provided that, if the notice is given
on or after the effective date of the merger or consolidation, such
notice shall be given by the surviving or resulting corporation to all
such holders of any class or series of stock of a constituent corporation
that are entitled to appraisal rights. Any stockholder entitled to
appraisal rights may, within twenty days after the date of mailing of
such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of
the stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before
the effective date of the merger or consolidation notifying each of the
holders of any class or series of stock of such constituent corporation
that are entitled to appraisal rights of the effective date of the merger
or
2
<PAGE>
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent
more than 20 days following the sending of the first notice, such second
notice need only to be sent to each stockholder who is entitled to
appraisal rights and who has demanded appraisal of such holder's shares
in accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is
required to give either notice that such notice has been given shall, in
the absence of fraud, be prima facie evidence of the facts stated
therein. For purposes of determining the stockholders entitled to receive
such notice, each constituent corporation may fix, in advance, a record
date that shall be not more than 10 days prior to the date the notice is
given; provided that, if the notice is given on or after the effective
date of the merger or consolidation, the record date shall be the
effective date. If no record date is fixed and the notice is given prior
to the effective date, the record date shall be the close of business on
the next day preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who
has complied with subsections (a) and (d) hereof and who is otherwise
entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within 60 days
after the effective date of the merger or consolidation, any stockholder
shall have the right to withdraw his demand for appraisal and to accept the
terms offered upon the merger or consolidation. Within 120 days after the
effective date of the merger or consolidation, any stockholder who has
complied with the requirements of subsections (a) and (d) hereof, upon
written request, shall be entitled to receive from the corporation surviving
the merger or resulting from the consolidation a statement setting forth the
aggregate number of shares not voted in favor of the merger or consolidation
and with respect to which demands for appraisal have been received and the
aggregate number of holders of such shares. Such written statement shall be
mailed to the stockholder within 10 days after his written request for such
a statement is received by the surviving or resulting corporation or within
10 days after expiration of the period for delivery of demands for appraisal
under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If
the petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such a duly verified list. The Register in
Chancery, if so ordered by the Court, shall give notice of the time and
place fixed for the hearing of such petition by registered or certified mail
to the surviving or resulting corporation and to the stockholders shown on
the list at the addresses therein stated. Such notice shall also be given by
1 or more publications at least 1 week before the day of the hearing, in a
newspaper of general circulation published in the City of Wilmington,
Delaware or such publication as the Court deems advisable. The forms of the
notices by mail and by publication shall be approved by the Court, and the
costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock represented
by certificates to submit their certificates of stock to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings;
and if any stockholder fails to comply with such direction, the Court may
dismiss the proceedings as to such stockholder.
3
<PAGE>
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In determining such
fair value, the Court shall take into account all relevant factors. In
determining the fair rate of interest, the Court may consider all relevant
factors, including the rate of interest which the surviving or resulting
corporation would have had to pay to borrow money during the pendency of the
proceeding. Upon application by the surviving or resulting corporation or by
any stockholder entitled to participate in the appraisal proceeding, the
Court may, in its discretion, permit discovery or other pretrial proceedings
and may proceed to trial upon the appraisal prior to the final determination
of the stockholder entitled to an appraisal. Any stockholder whose name
appears on the list filed by the surviving or resulting corporation pursuant
to subsection (f) of this section and who has submitted his certificates of
stock to the Register in Chancery, if such is required, may participate
fully in all proceedings until it is finally determined that he is not
entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as
the Court may direct. Payment shall be so made to each such stockholder, in
the case of holders of uncertificated stock forthwith, and the case of
holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree
may be enforced as other decrees in the Court of Chancery may be enforced,
whether such surviving or resulting corporation be a corporation of this
State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances.
Upon application of a stockholder, the Court may order all or a portion of
the expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and
the fees and expenses of experts, to be charged pro rata against the value
of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or
to receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed
within the time provided in subsection (e) of this section, or if such
stockholder shall deliver to the surviving or resulting corporation a
written withdrawal of his demand for an appraisal and an acceptance of the
merger or consolidation, either within 60 days after the effective date of
the merger or consolidation as provided in subsection (e) of this section or
thereafter with the written approval of the corporation, then the right of
such stockholder to an appraisal shall cease. Notwithstanding the foregoing,
no appraisal proceeding in the Court of Chancery shall be dismissed as to
any stockholder without the approval of the Court, and such approval may be
conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation.
4
<PAGE>
APPENDIX E
SECOND AMENDED
1992 NON-OFFICER DIRECTORS
STOCK OPTION PLAN
OF
PACIFICARE HEALTH SYSTEMS, INC.
1. PURPOSE.
This Second 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 "Class B Common Stock").
The total number of shares of Class B Common Stock which may be the subject of
options granted pursuant to this Plan shall be limited so that the total number
of shares of Class B Common Stock issued upon the exercise of options granted
under this Plan shall not exceed 390,000, subject to adjustment as provided in
Section 10 of this Plan. In the event that any option granted hereunder expires
or is terminated or canceled prior to its exercise in full for any reason, the
shares subject to such option shall be added to the shares of Class B Common
Stock otherwise available for issuance pursuant to the exercise of options under
this Plan.
3. ADMINISTRATION OF THE PLAN.
(a) DUTIES AND POWERS OF THE COMMITTEE. This Plan shall be administered by
a committee of the Board of Directors of the Company (the "Board") comprised of
two or more members of the Board, selected by the Board (the "Committee"). It
shall be the duty of the Committee to conduct the general administration of this
Plan in accordance with its provisions. The Committee shall have the power to
interpret this Plan and the respective option agreements and to adopt such rules
for the administration, interpretation and application of this Plan as are
consistent therewith and to interpret, amend or revoke any such rules. 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 of Class B Common Stock 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 Section
4 of this Plan.
(b) MAJORITY RULE. The Committee shall act by a majority of its members in
office. The Committee may act either by vote at a meeting or by a memorandum or
other written instrument signed by a majority of the Committee.
(c) COMPENSATION; PROFESSIONAL ASSISTANCE; GOOD FAITH ACTIONS. Members of
the Committee shall not receive compensation for their services as members but
all expenses and liabilities they incur in connection with the administration of
this Plan shall be borne by the Company. The Committee may, with the approval of
the Board, employ attorneys, consultants, accountants, appraisers, brokers or
other persons. The Committee, the Company and its officers and directors shall
be entitled to rely upon the advice, opinions or valuations of any such persons.
All actions taken and all interpretations and determinations made by the
Committee in good faith shall be final and binding upon all optionees, the
Company and all other interested persons. No member of the Committee shall be
personally liable
1
<PAGE>
for any action, determination or interpretation made in good faith with respect
to this Plan or the options and all members of the Committee shall be fully
protected by the Company in respect to any such action, determination or
interpretation.
4. GRANT OF STOCK OPTIONS.
(a) 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").
(b) STOCK OPTION GRANTS.
(i) The Committee shall, subject to the applicable limits of this Plan,
automatically grant each Eligible Director, upon being elected to the Board,
options to purchase 10,000 shares of Class B Common Stock.
(ii) The Committee shall, subject to the applicable limits of this Plan,
automatically grant each Eligible Director annually options to purchase
5,000 shares of Class B Common Stock on the 31st day of December in each
calendar year commencing December 31, 1996; 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 this Plan, automatically grant annually each such
person options to purchase 5,000 shares of Class B Common Stock on the 31st
day of December in each calendar year 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 of Class
B Common Stock which may be the subject of options under this Plan is not
sufficient to make all automatic grants required to be made pursuant to this
Plan on the applicable date, the number of shares of Class B Common Stock
subject to the options granted to each director shall be reduced on a pro
rata basis.
(c) OPTION PRICE. The exercise price for the shares of Class B Common
Stock purchasable under any option granted hereunder shall be an amount equal to
100 percent of the Fair Market Value of the Class B Common Stock on the date of
grant. For purposes of this Plan, the "Fair Market Value" of the Class B Common
Stock on a given date shall be based upon: (i) the closing price per share of
the Class B Common Stock on the principal exchange on which the Class B Common
Stock is then trading, if any, on such date, or, if the Class B Common Stock was
not traded on such date, then on the next preceding trading day during which a
sale occurred; or (ii) if the Class B Common Stock was not traded on an exchange
but is quoted on the National Association of Securities Dealers Automatic
Quotation System ("Nasdaq") or a successor quotation system, (1) the last sales
price (if the Class B Common Stock is then listed as a National Market Issue
under the Nasdaq National Market System), or (2) the mean between the closing
representative bid and asked prices (in all other cases) for the Class B Common
Stock on such date as reported by Nasdaq or such successor quotation system; or
(iii) if the Class B Common Stock is not publicly traded on an exchange and not
quoted on Nasdaq or a successor quotation system, the mean between the closing
bid and asked prices for the Class B Common Stock on such date as determined in
good faith by the Committee; or (iv) if the Class B Common Stock is not publicly
traded, the fair market value established by the Committee acting in good faith.
2
<PAGE>
5. TERMS AND CONDITIONS OF OPTIONS; VESTING.
(a) COMMENCEMENT OF EXERCISABILITY. Subject to Sections 5(b) and (c), and
Sections 7, 8 and 14, each option granted under this Plan shall become
exercisable in four cumulative installments as follows:
(i) The first installment shall consist of 25 percent of the shares of
Class B Common Stock covered by the option and shall become exercisable on
the first anniversary of the date of grant;
(ii) The second installment shall consist of 25 percent of the shares of
Class B Common Stock covered by the option and shall become exercisable on
the second anniversary of the date of grant;
(iii) The third installment shall consist of 25 percent of the shares of
Class B Common Stock covered by the option and shall become exercisable on
the third anniversary of the date of grant; and
(iv) The fourth installment shall consist of all remaining shares of
Class B Common Stock covered by the option and shall become exercisable on
the fourth anniversary of the date of grant.
(b) VESTING CUMULATIVE. The installments provided for in this Section 5
are cumulative. Each such installment which becomes exercisable pursuant to
Section 5(a) shall remain exercisable until such installment becomes
unexercisable under Section 7. No portion of an option which is unexercisable at
Termination of Directorship (as defined in Section 7) shall thereafter be
exercisable.
(c) STOCK OPTION AGREEMENT. Subject to Section 14, the grant of options by
the Committee shall be effective as of the date of grant; provided, however,
that no option granted hereunder shall be exercisable unless and until the
holder shall enter into an individual option agreement with the Company that
shall set forth the terms and conditions of such option. Each such agreement
shall expressly incorporate by reference the provisions of this Plan (a copy of
which shall be made available for inspection by the optionee during normal
business hours at the principal office of the Company) and shall state that in
the event of any inconsistency between the provisions hereof and the provisions
of such agreement, the provisions of this Plan shall govern.
6. EXERCISE OF OPTIONS.
(a) PERSON ELIGIBLE TO EXERCISE. 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
Section 7, be exercised by his personal representative or by any person
empowered to do so under the deceased optionee's will or under the applicable
laws of descent and distribution.
(b) PARTIAL EXERCISE. At any time and from time to time prior to when any
exercisable option or exercisable portion thereof becomes unexercisable under
Section 7, such option or portion thereof may be exercised in whole or in part;
provided, however, that the Company shall not be required to issue fractional
shares and the number of shares for which an option may be partially exercised
shall be not less than 100 shares.
(c) MANNER OF EXERCISE. An exercisable option, or any exercisable portion
thereof, may be exercised solely by delivery to the Secretary or Chief Financial
Officer of the Company or their respective offices of all of the following prior
to the time when such option or such portion becomes unexercisable under this
Plan:
(i) Notice in writing signed by the optionee or other person then
entitled to exercise such option or portion, stating that such option or
portion is exercised, such notice complying with all applicable rules
established by the Committee;
(ii) (A) Full payment (in cash or by check) for the shares with respect
to which such option or portion is hereby exercised;
3
<PAGE>
(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 Section 4(c)) on
the date of delivery equal to the aggregate option price of the shares of
Class B Common Stock with respect to which such option or portion is
thereby exercised (which shares shall be owned by the optionee for more
than six months at the time they are delivered);
(C) With the consent of the Committee, any other form of cashless
exercise permitted under Section 6(d) hereof; or
(D) Any combination of the consideration provided in the foregoing
subsections (A), (B) and (C);
(iii) Such representations and documents as the Committee, in its
absolute discretion, deems necessary or advisable to effect compliance with
all applicable provisions of the Securities Act of 1933, as amended, and any
other federal or state securities laws or regulations. The Committee may, in
its absolute discretion, also take whatever additional actions it deems
appropriate to effect such compliance including, without limitation, placing
legends on share certificates and issuing stop transfer orders to transfer
agents and registrars; and
(iv) In the event that the option, or portion thereof, shall be exercised
by any person or persons other than the optionee, appropriate proof of the
right of such person or persons to exercise the option or portion thereof.
(d) CASHLESS EXERCISE. The Company, in its sole discretion, may establish
procedures whereby an optionee, to the extent permitted by and subject to the
requirements of Rule 16b-3 under the 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.
7. EXPIRATION OF OPTIONS.
No option may be exercised to any extent by anyone after the first to occur
of the following events:
(i) The expiration of 10 years and one day from the date the option was
granted; or
(ii) 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
(iii) The expiration of one year from the date of the optionee's
Termination of Directorship by reason of his disability; or
(iv) The expiration of one year from the date of optionee's death.
For purposes of this Section 7, "disability" shall mean a medically
determinable physical or mental impairment which has lasted or can be expected
to last for a continuous period of not less than 12 months and which renders a
director substantially unable to function as a director of the Company. Nothing
contained herein or in any option agreement shall be construed to confer on any
optionee any right to continue as a director of the Company.
4
<PAGE>
8. ACCELERATION OF VESTING UPON A CHANGE OF CONTROL.
Notwithstanding anything to the contrary in Section 7 and/or any vesting
provisions of any option, any option which has been held for at least six months
shall become exercisable immediately upon the effective date of a "Change of
Control." As used in this Section 8, the term "Change of Control" shall mean the
occurrence of any of the following: (i) a business combination effectuated
through the merger or consolidation of the Company with or into another entity
where the Company is not the Surviving Organization; (ii) any business
combination effectuated through the merger or consolidation of the Company with
or into another entity where the Company is the Surviving Organization and such
business combination occurred with an entity whose market capitalization prior
to the transaction was greater than 50 percent of the Company's market
capitalization prior to the transaction; (iii) the sale in a transaction or
series of transactions of all or substantially all of the Company's assets; (iv)
any "person" or "group" (within the meaning of Sections 13(d) and 14(d) of the
Exchange Act) other than UniHealth, a California nonprofit public benefit
corporation ("UniHealth"), acquires beneficial ownership (within the meaning of
Rule 13d-3 of the Exchange Act), directly or indirectly, of 20 percent or more
of the voting common stock of the Company and the beneficial ownership of the
voting common stock of the Company owned by UniHealth at that date is less than
or equal to the beneficial ownership interest of voting securities attributable
to such other person or group; (v) a dissolution or liquidation of the Company;
or (vi) the Company ceases to be subject to the reporting requirements of the
Exchange Act as a result of a "going private transaction" (within the meaning of
the Exchange Act). For purposes hereof, "Surviving Organization" shall mean any
entity where the majority of the members of such entity's board of directors are
persons who were members of the Company's board of directors prior to the
merger, consolidation or other business combination and the senior management of
the surviving entity includes all of the individuals who were the Company's
executive management (the Company's chief executive officer and those
individuals who report directly to the Company's chief executive officer) prior
to the merger, consolidation or other business combination and such individuals
are in at least comparable positions with such entity. The Committee may make
such determinations and interpretations and adopt such rules and conditions as
it, in its absolute discretion, deems appropriate in connection with a Change in
Control and acceleration of exercisability. All such determinations and
interpretations by the Committee shall be conclusive. Each optionee shall
receive at least 10 days' notice prior to the effective date of the Change of
Control that their options will be exercisable upon the effective date of the
Change of Control and the officers of the Company shall make adequate provisions
to permit all optionees to exercise their options as of the effective date of
the Change of Control.
9. NON-TRANSFERABILITY OF OPTIONS.
No option or interest or right therein or part thereof shall be liable for
the debts, contracts or engagements of the optionee or his successors in
interest or shall be subject to disposition by transfer, alienation,
anticipation, pledge, encumbrance, assignment or any other means whether such
disposition be voluntary or involuntary or by operation of law or judgment,
levy, attachment, garnishment or any other legal or equitable proceedings
(including bankruptcy) and any attempted disposition thereof shall be null and
void and of no effect; provided, however, that nothing in this Section 9 shall
prevent transfers by will or by the applicable laws of descent and distribution.
10. ADJUSTMENTS UPON CERTAIN EVENTS.
(a) CHANGES IN COMPANY'S SHARES. In the event that the outstanding shares
of Class B Common Stock of the Company are hereafter changed into or exchanged
for a different number or kind of shares or other securities of the Company, or
of another corporation, by reason of reorganization, merger, consolidation,
recapitalization, reclassification, stock split, stock dividend or combination
of shares, or in the event of extraordinary cash or non-cash dividends being
declared with respect to the outstanding shares of Class B Common Stock or other
similar transactions, proportionate adjustments shall be made by the Committee
in the number and kind of shares for the purchase of which
5
<PAGE>
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) ADJUSTMENTS IN OUTSTANDING AWARDS. In the event that the outstanding
shares of Class B Common Stock of the Company are hereafter changed into or
exchanged for a different number or kind of shares or other securities of the
Company, or of another corporation, by reason of reorganization, merger,
consolidation, recapitalization, reclassification, stock split, stock dividend
or combination of shares, or in the event of extraordinary cash or non-cash
dividends being declared with respect to the outstanding shares of Class B
Common Stock or other similar transactions, the Committee shall make
proportionate adjustments in the number and kind of shares as to which all
outstanding options, or portions thereof then unexercised, shall be exercisable,
to the end that after such event the optionee's 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.
11. GENERAL RESTRICTIONS.
(a) CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES. The shares of Class B
Common Stock issuable and deliverable upon the exercise of any option, or any
portion thereof, may be either previously authorized but unissued shares of
Class B Common Stock or issued shares of Class B Common Stock which have then
been reacquired by the Company. The Company shall not be required to issue or
deliver any certificate or certificates for shares of Class B Common Stock
purchased upon the exercise of any option or portion thereof prior to
fulfillment of all of the following conditions:
(i) The admission of such shares of Class B Common Stock to listing on
all stock exchanges on which such class of stock is then listed;
(ii) The completion of any registration or other qualification of such
shares of Class B Common Stock under any state or federal law or under the
rulings or regulations of the Securities and Exchange Commission or any
other governmental regulatory body, which the Committee shall, in its
absolute discretion, deem necessary or advisable;
(iii) The obtaining of any approval or other clearance from any state or
federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable;
(iv) The payment to the Company of all amounts which it is required to
withhold under federal, state or local law in connection with the exercise
of the option; and
(v) The lapse of such reasonable period of time following the exercise
of the option as the Committee may establish from time to time for reasons
of administrative convenience.
(b) RIGHTS AS STOCKHOLDERS. The holders of options shall not be, nor have
any of the rights or privileges of, stockholders of the Company in respect of
any shares of Class B Common Stock receivable upon the exercise of any part of
an option unless and until certificates representing the shares of Class B
Common Stock have been issued by the Company to such holders.
12. WITHHOLDING TAX LIABILITY.
(a) A holder of an option granted hereunder may elect to deliver shares of
Class B Common Stock to the Company or have the Company withhold shares
otherwise issuable upon the exercise of an option in order to satisfy federal,
state and local withholding tax liability (a "share withholding election"),
provided: (i) the Board or, if so designated, the Committee, shall not have
revoked its
6
<PAGE>
advance approval of the holder's share withholding election; and (ii) the share
withholding election is made on or prior to the date on which the amount of
withholding tax liability is determined (the "Tax Date"). Notwithstanding the
foregoing, a holder whose transactions in the Company's equity securities are
subject to Section 16(b) of the Exchange Act may make a share withholding
election only if the following additional conditions are met: (i) the
withholding is made at least six months after the date of the grant of the
option; and (ii) either (x) the share withholding election is irrevocably made
at least six months in advance of the withholding, or (y) the share withholding
election and the share withholding take place during the period beginning on the
third business day following the date of release of the Company's quarterly or
annual financial results and ending on the twelfth business day following such
date.
(b) A share withholding election shall be deemed made when written notice of
such election, signed by the holder, has been delivered or transmitted by
registered or certified mail to the Secretary or Chief Financial Officer of the
Company at its then principal office. Delivery of said notice shall constitute
an irrevocable election to have shares withheld.
(c) Upon exercise of an option by a holder, the Company shall transfer the
total number of shares of Class B Common Stock subject to the option to the
holder on the date of exercise, less any shares of Class B Common Stock the
holder elects to withhold.
13. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN.
This Plan may be wholly or partially amended or otherwise modified,
suspended or terminated at any time or from time to time by the Board; provided
that: (i) the Board may not amend or modify this 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 this
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 this Plan, and
in no event may any option be granted under this Plan after the expiration of 10
years from the date this Plan is approved by the Company's stockholders under
Section 14.
14. APPROVAL OF PLAN BY STOCKHOLDERS.
This Plan will be submitted for the approval of the Company's stockholders
within 12 months after the date of the Board's initial adoption of this Plan.
Options may be granted prior to such stockholder approval; provided, however,
that such options shall not be exercisable prior to the time when this Plan is
approved by the stockholders; provided, further, that if such approval has not
been obtained at the end of said 12-month period, all options previously granted
under this Plan shall thereupon be canceled and become null and void.
15. EFFECTIVE DATE OF PLAN.
Subject to Section 14, the effective date of this Plan shall be December 1,
1996.
7
<PAGE>
FHP INTERNATIONAL CORPORATION
P.O. BOX 25186
Santa Ana, CA 92799-5186
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Kenneth S. Ord, Charles H. Eldredge and
Russell D. Phillips, Jr. as Proxies, each with the power to appoint his
substitute and authorizes them to represent and vote, as designated, the
Series A Cumulative Convertible Preferred Stock ("FHP Preferred Stock") of
FHP International Corporation (the "Company") owned or held by the
undersigned on November 8, 1996, at the annual meeting of stockholders of the
Company to be held on December 31, 1996, or any adjournment thereof.
(Continued and to be signed on reverse side.)
<PAGE>
/X/ PLEASE MARK YOUR VOTES AS IN THIS EXAMPLE.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY PROMPTLY USING THE ENCLOSED
ENVELOPE.
For Against Abstain
1. Proposal to approve an amendment to the / / / / / /
Company's Certificate of Incorporation.
2. In their discretion the proxies may vote upon such other matters as may
properly come before the meeting and upon which the FHP Preferred Stock is
entitled to vote.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THE PROXY WILL BE VOTED
FOR PROPOSAL 1.
Please date and sign exactly as name appears at the left. When shares are held
by joint owners, both should sign. When signing as an attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name and give title of authorized
officer. If a partnership, please sign in partnership name by authorized
person.
SIGNATURE(S)_______________________________________ DATE__________________, 1996
<PAGE>
FHP INTERNATIONAL CORPORATION
P.O. BOX 25186
SANTA ANA, CA 92799-5186
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Kenneth S. Ord, Charles H. Eldredge and
Russell D. Phillips, Jr. as Proxies, each with the power to appoint his
substitute and authorizes them to represent and vote, as designated, the
Common Stock of FHP International Corporation (the "Company") owned or held
by the undersigned on November 8, 1996, at the annual meeting of stockholders
of the Company to be held on December 31, 1996, or any adjournment thereof.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
<PAGE>
/x/ PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE.
FOR all nominees listed WITHHOLD AUTHORITY
below (Except as marked to vote for all
to the contrary below.) nominees listed below
1. Election of / / / /
Directors
(INSTRUCTION: To withhold authority to vote for any individual nominee, strike a
line through the nominee's name indicated below.)
Jack R. Anderson Burke F. Gumbiner Warner Heineman
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY PROMPTLY USING THE ENCLOSED
ENVELOPE.
For Against Abstain
2. Proposal to approve reorganization / / / / / /
agreement.
3. Proposal to approve an amendment to the / / / / / /
Company's Certificate of Incorporation.
4. Proposal to ratify appointment of Deloitte / / / / / /
& Touche LLP As Independent Auditors for
the Company.
5. In their discretion the proxies may vote / / / / / /
upon such other matters as may properly
come before the meeting.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THE PROXY WILL BE VOTED
FOR PROPOSALS 1 THROUGH 4.
PLEASE DATE AND SIGN EXACTLY AS NAME APPEARS AT THE LEFT. WHEN SHARES ARE HELD
BY JOINT OWNERS, BOTH SHOULD SIGN. WHEN SIGNING AS AN ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A
CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME AND GIVE TITLE OF AUTHORIZED
OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED
PERSON.
SIGNATURE(S)____________________________________________DATE____________, 1996
<PAGE>
VOTING INSTRUCTIONS TO TRUSTEE
FOR THE ANNUAL MEETING OF STOCKHOLDERS--DECEMBER 31, 1996
THE TRUSTEE SOLICITS THESE VOTING INSTRUCTIONS
FROM PARTICIPANTS IN THE FHP INTERNATIONAL CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN
The undersigned Participant in the FHP International Corporation ESOP (the
"Plan") hereby instructs Wells Fargo Bank ("Trustee"), to vote all shares of
Common Stock of FHP International Corporation (the "Company") allocated to the
accounts of the undersigned under the Plan and a proportionate number of shares
not yet allocated to the Participant's accounts in accordance with the
instructions on this card, and to act in its discretion upon such other business
as may properly come before, and to represent the undersigned at, the Annual
Meeting of Stockholders of the Company to be held on December 31, 1996, or any
adjournment thereof.
PLEASE CAREFULLY REVIEW THE ENCLOSED NOTICE TO ESOP PARTICIPANTS
BEFORE COMPLETING AND MAILING THIS CARD.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
<PAGE>
/x/ PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE.
FOR all Nominees WITHHOLD
listed below (Except AUTHORITY
as marked to the to vote for all
contrary below.) nominees listed below
1. Election of / / / /
Directors.
(INSTRUCTION: To withhold authority to vote for any individual nominee, strike a
line through the nominee's name indicated below.)
Jack R. Anderson Burke F. Gumbiner Warner Heineman
FOR AGAINST ABSTAIN
2. Proposal to approve reorganization agreement. / / / / / /
3. Proposal to approve an amendment to the Company's / / / / / /
Certificate of Incorporation.
4. Proposal to ratify appointment of Deloitte & / / / / / /
Touche LLP as Independent Auditors for the Company.
5. In its discretion the Trustee may vote upon such
other matters as may properly come before the
meeting.
IF THIS CARD IS PROPERLY EXECUTED, THE TRUSTEE WILL VOTE IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THE TRUSTEE WILL
VOTE FOR PROPOSALS 1 THROUGH 4.
ALLOCATED SHARES ONLY / /
SIGNATURE(S)______________________________________________ DATE __________, 1996
PLEASE DATE AND SIGN EXACTLY AS NAME APPEARS AT THE LEFT. WHEN SHARES ARE HELD
BY JOINT OWNERS, BOTH SHOULD SIGN. WHEN SIGNING AS AN ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH.
<PAGE>
FORM OF IRREVOCABLE ELECTION
(TO ACCOMPANY CERTIFICATES FOR SHARES OF SERIES A CUMULATIVE CONVERTIBLE
PREFERRED STOCK)
OF
FHP INTERNATIONAL CORPORATION
PLEASE FOLLOW CAREFULLY THE INSTRUCTIONS SET FORTH BELOW
IMPORTANT: THIS FORM OF IRREVOCABLE ELECTION, PROPERLY COMPLETED AND EXECUTED IN
ACCORDANCE WITH THE INSTRUCTIONS SET FORTH BELOW, TOGETHER WITH YOUR
CERTIFICATE(S) FOR SHARES ("FHP PREFERRED SHARES") OF SERIES A CUMULATIVE
CONVERTIBLE PREFERRED STOCK ("FHP PREFERRED STOCK") OF FHP INTERNATIONAL
CORPORATION ("FHP"), MUST BE RECEIVED BY AMERICAN STOCK TRANSFER & TRUST COMPANY
(THE "IRREVOCABLE ELECTION AGENT") PRIOR TO 5:00 P.M., EASTERN STANDARD TIME ON
DECEMBER 27, 1996 ("THE ELECTION DEADLINE") (UNLESS DELIVERY IS GUARANTEED IN
BOX C BELOW IN ACCORDANCE WITH INSTRUCTION A). DELIVERIES MADE TO ADDRESSES
OTHER THAN THE ADDRESS FOR THE IRREVOCABLE ELECTION AGENT SET FORTH BELOW DO NOT
CONSTITUTE VALID DELIVERIES AND THE IRREVOCABLE ELECTION AGENT WILL NOT BE
RESPONSIBLE THEREFOR.
PLEASE READ AND FOLLOW CAREFULLY THE INSTRUCTIONS SET FORTH BELOW, WHICH SET
FORTH THE REQUIREMENTS THAT MUST BE COMPLIED WITH IN ORDER TO MAKE AN EFFECTIVE
ELECTION. NOMINEES, TRUSTEES, OR OTHER PERSONS WHO HOLD FHP PREFERRED SHARES IN
A REPRESENTATIVE CAPACITY ARE DIRECTED TO INSTRUCTION E(3).
THIS FORM OF IRREVOCABLE ELECTION IS TO BE EXECUTED AND RETURNED TO THE
IRREVOCABLE ELECTION AGENT AT THE FOLLOWING ADDRESS:
IRREVOCABLE ELECTION AGENT:
AMERICAN STOCK TRANSFER & TRUST COMPANY
<TABLE>
<S> <C>
BY HAND, REGISTERED OR CERTIFIED MAIL OR OVERNIGHT COURIER: BY FACSIMILE:
AMERICAN STOCK TRANSFER & TRUST COMPANY (718) 921-8336
6201 FIFTEENTH AVENUE
BROOKLYN, NEW YORK 11219 FOR INFORMATION CALL:
(718) 921-8206
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE WILL NOT
CONSTITUTE A VALID DELIVERY. THE ACCOMPANYING INSTRUCTIONS SHOULD BE READ
CAREFULLY BEFORE THIS FORM OF IRREVOCABLE ELECTION IS COMPLETED.
1
<PAGE>
PLEASE READ CAREFULLY THE ACCOMPANYING INSTRUCTIONS
Ladies and Gentlemen:
1. Pursuant to the terms of an Amended and Restated Agreement and Plan of
Reorganization dated as of November 11, 1996 (as amended from time to time, the
"Reorganization Agreement") among N-T Holdings, Inc. ("PacifiCare Holding"),
PacifiCare Health Systems, Inc. ("PacifiCare"), Neptune Merger Corp., Tree
Acquisition Corp. ("FHP Merger Sub") and FHP, and in connection with the merger
of FHP and FHP Merger Sub (the "FHP Merger") as contemplated thereunder,
assuming approval of the Series A Amendment (as defined below), the undersigned,
as a holder of FHP Preferred Shares, would be entitled to receive for each FHP
Preferred Share, upon consummation of the FHP Merger, an amount of cash equal to
$14.113, one-half ( 1/2) share of Series A Cumulative Convertible Preferred
Stock of PacifiCare Holding and Talbert Rights (as defined in the Reorganization
Agreement) (collectively, the "Series A Merger Consideration"). Pursuant to the
Certificate of Designation of Powers, Preferences and Rights of FHP Preferred
Stock (the "Series A Certificate"), if an amendment to the Series A Certificate
(the "Series A Amendment") is not approved, the undersigned, upon consummation
of the FHP Merger, would be entitled to (i) exercise certain "Special Conversion
Rights" (as defined in the Series A Certificate), or (ii) waive such Special
Conversion Rights and elect to receive the same consideration in the FHP Merger
that such holder would have received if such holder had converted such holder's
FHP Preferred Shares into shares of common stock of FHP immediately prior to the
effective time ("Effective Time") of the FHP Merger (the "As-If-Converted Merger
Consideration"), as set forth in the Series A Certificate.
2. By completing this Form of Irrevocable Election, transmitting the
certificate(s) representing FHP Preferred Shares (or complying with the
procedures for guaranteed delivery set forth below) identified in Box A below as
to which an Irrevocable Election (as defined below) is made, and otherwise
complying with the instructions set forth herein, the undersigned, subject to
the terms and conditions set forth in this Form of Irrevocable Election,
including the documents incorporated herein by reference, hereby (a) surrenders
the certificate(s) (the "Certificates") representing the FHP Preferred Shares
listed in Box A (Certificate Information) and (b) irrevocably elects (an
"Irrevocable Election"), as indicated below, with respect to all FHP Preferred
Shares represented by the Certificate(s), to receive in the FHP Merger the
Series A Merger Consideration whether or not the Series A Amendment is approved
and waive such holder's rights to (1) exercise Special Conversion Rights; (2)
receive As-If-Converted Merger Consideration; and (3) convert FHP Preferred
Shares into shares of Common Stock of FHP. Further, the undersigned hereby
irrevocably agrees not to gift, sell, hypothecate or in any other manner
transfer such FHP Preferred Shares to any person who does not expressly accept
such stock subject to such Irrevocable Election and does not agree to be bound
thereby. Notwithstanding the foregoing, the restrictions imposed by this
Irrevocable Election shall lapse if the Reorganization Agreement shall terminate
in accordance with its terms prior to the Effective Time.
3. If the Irrevocable Election Agent has not received your properly
completed Form of Irrevocable Election, accompanied by your Certificates (unless
Box C (Guaranty of Delivery) has been properly completed and such Certificates
are received by the Irrevocable Election Agent by the Guaranteed Delivery
Deadline (as defined below)), by the Election Deadline of 5:00 p.m., Eastern
Standard Time, on December 27, 1996, in the event the Series A Amendment is not
approved, you will not receive the Series A Merger Consideration. See "The
Mergers and Related Transactions--Merger Consideration--FHP-- Irrevocable
Election by the FHP Preferred Stockholders" in the Joint Proxy
Statement/Prospectus (as defined below).
4. This Irrevocable Election is subject to the terms and conditions set
forth in the Reorganization Agreement and the Joint Proxy Statement/Prospectus
delivered in connection therewith (the "Joint Proxy Statement/Prospectus"),
furnished to stockholders of FHP in connection with the FHP Merger and
accompanying this Form of Irrevocable Election, all of which are incorporated
herein by reference.
2
<PAGE>
Receipt of the Joint Proxy Statement/Prospectus, including the Reorganization
Agreement attached thereto, is hereby acknowledged. Copies of the Joint Proxy
Statement/Prospectus are available upon request (see Instruction F(6)).
5. Holders of FHP Preferred Shares who make the Irrevocable Election are
still entitled to vote with respect to the Series A Amendment and other matters
to be considered by holders of FHP Preferred Shares at the FHP Meeting (as
defined in the Joint Proxy Statement/Prospectus) and are encouraged to vote FOR
the transactions contemplated by the Reorganization Agreement and FOR the Series
A Amendment in person or by proxy. See "The FHP Meeting" in the Joint Proxy
Statement/Prospectus.
6. The Irrevocable Election applies to all the FHP Preferred Shares
represented by the Certificates. The undersigned acknowledges that, following
consummation of the Mergers, he, she or it must complete and execute a letter of
transmittal in the form provided by PacifiCare Holding in order to receive the
Series A Merger Consideration.
7. The undersigned authorizes the Irrevocable Election Agent to deliver the
Certificates and this Form of Irrevocable Election to ChaseMellon Shareholder
Services L.L.C. (the "Exchange Agent"), if the FHP Merger is consummated.
3
<PAGE>
FORM OF IRREVOCABLE ELECTION
EXECUTION SECTION
BOX A: ELECTION AND DESCRIPTION OF SHARES SURRENDERED
<TABLE>
<S> <C> <C>
NAME(S) AND ADDRESS OF HOLDER OF RECORD AS SHOWN ON RECORDS OF FHP
(IF THE SPACE PROVIDED BELOW IS INADEQUATE, THE CERTIFICATE NUMBERS AND NUMBERS OF SHARES SHOULD BE LISTED
ON A SEPARATE SIGNED SCHEDULE AFFIXED HERETO.)
CERTIFICATE(S) SURRENDERED (ATTACH SEPARATE SCHEDULE IF NECESSARY)
COLUMN 1 COLUMN 2
NUMBER(S) OF CERTIFICATES
DELIVERED WITH NUMBER OF SHARES
PREVIOUS FORM OF REPRESENTED BY CERTIFICATES
DELIVERED HEREWITH ELECTION IN COLUMN 1
TOTALS
</TABLE>
ALL FHP PREFERRED SHARES REPRESENTED BY CERTIFICATES LISTED IN COLUMN 1 WILL BE
DEEMED TO HAVE BEEN SURRENDERED AND TO BE SUBJECT TO THE IRREVOCABLE ELECTION.
4
<PAGE>
BOX B
SIGN HERE
By signing below and complying with the other terms and conditions hereof, the
undersigned hereby represents and warrants that the undersigned has full power
and authority to complete and deliver this Form of Irrevocable Election and to
deliver for surrender and cancellation the above-described Certificate(s)
delivered herewith and that the rights represented by the Certificate(s) are
free and clear of all liens, restrictions, charges and encumbrances and are
not subject to any adverse claim. The undersigned will, upon request, execute
any additional documents necessary or desirable to complete the surrender of
the Certificate(s) surrendered herewith. All authority herein conferred shall
survive the death or incapacity of the undersigned and all obligations of the
undersigned hereunder shall be binding upon the heirs, personal
representatives, successors and assigns of the undersigned.
By signing below and complying with the other terms and conditions hereof, the
undersigned, subject to the terms and conditions set forth in this Form of
Irrevocable Election hereby (a) surrenders the Certificate(s) representing the
FHP Preferred Shares listed in Box A (Certificate Information), and (b)
irrevocably elects, with respect to all FHP Preferred Shares represented by
the Certificate(s), to receive in the FHP Merger the Series A Merger
Consideration whether or not the Series A Amendment is approved and waive such
holder's rights to (1) exercise Special Conversion Rights; (2) receive
As-If-Converted Merger Consideration; and (3) convert FHP Preferred Shares
into shares of Common Stock of FHP. Further, the undersigned hereby
irrevocably agrees not to gift, sell, hypothecate or in any other manner
transfer such FHP Preferred Shares to any person who does not expressly accept
such stock subject to such Irrevocable Election and does not agree to be bound
thereby. Notwithstanding the foregoing, the restrictions imposed by this
Irrevocable Election shall lapse if the Reorganization Agreement shall
terminate in accordance with its terms prior to the Effective Time.
To be completed by all person(s) surrendering certificates and executing this
Form of Irrevocable Election. Please sign exactly as indicated on the
Certificates.
Signature(s): ________________________________________________________________
_____________________________________________________________________
_______________________________________
Name(s) (Please Print)
_______________________________________
Title(s) (Please Print)
Date: ____________________ Telephone Number: ____________________
Address: ___________________________________________________________________
_____________________________________________________________________
5
<PAGE>
BOX C
GUARANTY OF DELIVERY
To be used only if Certificates are not surrendered herewith. (See Instruction
A.) The undersigned (check appropriate boxes below) guarantees to deliver to
the Irrevocable Election Agent at the appropriate address set forth above the
Certificates for FHP Preferred Shares submitted with this Form of Irrevocable
Election no later than 5:00 p.m., Eastern Standard Time, on January 2, 1997.
Only persons falling within one of the categories specified in the boxes below
may guaranty delivery.
<TABLE>
<S> <C> <C>
/ / A member of a registered national Firm: ----------------------------------------------
securities exchange
Authorized Signature: ----------------------------------------------
/ / A member of the National Address: ----------------------------------------------
Association of Securities Dealers,
Inc.
----------------------------------------------
/ / A commercial bank or trust company Telephone Number: ----------------------------------------------
in the United States
</TABLE>
6
<PAGE>
INSTRUCTIONS
The Execution Section of this Form of Irrevocable Election should be
properly filled in, dated, signed and delivered, together with the Certificates
(unless delivery is guaranteed in Box C in accordance with Instruction A) as to
which an Irrevocable Election is made, to the Irrevocable Election Agent at the
appropriate address set forth on the front of this Form of Irrevocable Election.
Please read and follow carefully the instructions regarding completion of this
Form of Irrevocable Election set forth below. If you have any questions
concerning this Form of Irrevocable Election or require any information or
assistance, see Instruction F(6).
A. TIME IN WHICH TO ELECT
In order for an Irrevocable Election to be effective, the Irrevocable
Election Agent must receive a properly completed Form of Irrevocable Election,
accompanied by the Certificates representing FHP Preferred Shares currently held
by you as to which an Irrevocable Election is made NO LATER THAN 5:00 P.M.,
EASTERN STANDARD TIME, ON DECEMBER 27, 1996. STOCKHOLDERS SEEKING TO MAKE THE
IRREVOCABLE ELECTION MUST DELIVER A PROPERLY COMPLETED FORM OF IRREVOCABLE
ELECTION, ACCOMPANIED BY STOCK CERTIFICATES (OR A PROPER GUARANTY OF DELIVERY,
AS DESCRIBED BELOW), NO LATER THAN 5:00 P.M., EASTERN STANDARD TIME, ON DECEMBER
27, 1996 (THE "ELECTION DEADLINE"), IN ORDER TO ASSURE THAT THEIR FORM OF
IRREVOCABLE ELECTION WILL BE RECEIVED BY THE ELECTION DEADLINE. Persons whose
Certificates are not immediately available may also make an Irrevocable Election
by completing this Form of Irrevocable Election and having Box C (Guaranty of
Delivery) properly completed and duly executed by a member of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc. or a commercial bank or trust company having an office or
correspondent in the United States (subject to the condition that the
Certificates, the delivery of which is thereby guaranteed, are in fact delivered
to the Irrevocable Election Agent no later than 5:00 p.m., Eastern Standard
Time, on January 2, 1997 (the "Guaranteed Delivery Deadline").
IF THE IRREVOCABLE ELECTION AGENT HAS NOT RECEIVED YOUR PROPERLY COMPLETED
FORM OF IRREVOCABLE ELECTION, ACCOMPANIED BY YOUR STOCK CERTIFICATES, BY THE
ELECTION DEADLINE (UNLESS BOX C (GUARANTY OF DELIVERY) HAS BEEN PROPERLY
COMPLETED AND SUCH CERTIFICATES ARE RECEIVED BY THE IRREVOCABLE ELECTION AGENT
BY THE GUARANTEED DELIVERY DEADLINE), THIS IRREVOCABLE ELECTION WILL NOT BE
EFFECTIVE. SEE "THE MERGERS AND RELATED TRANSACTIONS--MERGER
CONSIDERATION--FHP--IRREVOCABLE ELECTION BY THE FHP PREFERRED STOCKHOLDERS" IN
THE JOINT PROXY STATEMENT/PROSPECTUS.
B. ELECTION
This Form of Irrevocable Election provides for your election, subject to the
terms and conditions set forth hereunder and in the documents incorporated
herein by reference, upon consummation of the FHP Merger to have each of the FHP
Preferred Shares represented by the Certificates converted into the right to
receive the Series A Merger Consideration.
You should understand that your Irrevocable Election is subject to certain
terms and conditions that are set forth in the Reorganization Agreement and
described in the Joint Proxy Statement/Prospectus. The Reorganization Agreement
is attached to the Joint Proxy Statement/Prospectus as Appendix A. Copies of the
Joint Proxy Statement/Prospectus may be requested from the Irrevocable Election
Agent as described in Instruction F(6) below. The delivery of this Form of
Irrevocable Election to the Irrevocable Election Agent constitutes
acknowledgment of the receipt of the Joint Proxy Statement/Prospectus. EACH
HOLDER OF FHP PREFERRED SHARES IS STRONGLY ENCOURAGED TO READ THE JOINT PROXY
STATEMENT/PROSPECTUS IN ITS ENTIRETY AND TO DISCUSS THE CONTENTS
7
<PAGE>
THEREOF AND THIS FORM OF IRREVOCABLE ELECTION WITH HIS OR HER PERSONAL FINANCIAL
AND TAX ADVISORS PRIOR TO DECIDING WHETHER TO MAKE THIS IRREVOCABLE ELECTION.
THE TAX CONSEQUENCES TO A HOLDER OF FHP PREFERRED SHARES WILL VARY DEPENDING
UPON A NUMBER OF FACTORS. FOR CERTAIN INFORMATION REGARDING THE FEDERAL INCOME
TAX CONSEQUENCES OF AN IRREVOCABLE ELECTION, SEE "THE MERGERS AND RELATED
TRANSACTIONS--CERTAIN FEDERAL INCOME TAX CONSEQUENCES" IN THE JOINT PROXY
STATEMENT/PROSPECTUS.
C. IRREVOCABLE ELECTION
By completing and submitting the Form of Irrevocable Election, you are
irrevocably electing, subject to the terms and conditions set forth in this Form
of Irrevocable Election, with respect to all FHP Preferred Shares represented by
the Certificate(s), to receive in the FHP Merger the Series A Merger
Consideration whether or not the Series A Amendment is approved and waive your
rights to (1) exercise Special Conversion Rights; (2) receive As-If-Converted
Merger Consideration; and (3) convert FHP Preferred Shares into shares of Common
Stock of FHP. Further, you irrevocably agree not to gift, sell, hypothecate or
in any other manner transfer such FHP Preferred Shares to any person who does
not expressly accept such stock subject to such Irrevocable Election and does
not agree to be bound thereby. Notwithstanding the foregoing, the restrictions
imposed by this Irrevocable Election shall lapse if the Reorganization Agreement
shall terminate in accordance with its terms prior to the Effective Time.
D. FAILURE TO MAKE EFFECTIVE IRREVOCABLE ELECTION
If you fail to make an effective Irrevocable Election, or if your
Irrevocable Election is deemed by the Irrevocable Election Agent or FHP to be
defective in any way, or if your Form of Irrevocable Election is not accompanied
by your Certificates (unless Box C (Guaranty of Delivery) has been properly
completed and such Certificates are received by the Irrevocable Election Agent
by the Guaranteed Delivery Deadline), you will not receive the Series A Merger
Consideration unless the Series A Amendment is approved and the FHP Merger is
consummated. See "The Mergers and Related Transactions--Merger
Consideration--FHP--Irrevocable Election by the FHP Preferred Stockholders" in
the Joint Proxy Statement/Prospectus.
E. SPECIAL CONDITIONS
(1) ELECTION IRREVOCABLE. An Irrevocable Election may not be revoked by
the person or persons making such election, or any heir, successor or assign
thereof.
(2) NULLIFICATION OF ELECTION. All Forms of Irrevocable Election will be
void and of no effect if the FHP Merger is not consummated and the
Reorganization Agreement is terminated, and Certificates submitted therewith
shall be promptly returned to the persons submitting the same.
(3) SHARES HELD BY NOMINEES, TRUSTEES OR OTHER REPRESENTATIVES. Holders of
record of FHP Preferred Shares who hold such shares as nominees, trustees or in
other representative or fiduciary capacities (a "Representative") may submit one
or more Forms of Irrevocable Election covering the FHP Preferred Shares held by
such Representative on behalf of the beneficial owners for whom the
Representative is making an Irrevocable Election, provided, that such
Representative certifies that each such Form of Irrevocable Election covers all
the FHP Preferred Shares held by such Representative for a particular beneficial
owner as to which such owner has made an Irrevocable Election. Any
Representative who makes an Irrevocable Election may be required to provide the
Irrevocable Election Agent with such documents and/or additional certifications,
if requested, in order to satisfy the Irrevocable Election Agent that such
Representative holds such FHP Preferred Shares for a particular beneficial owner
of such shares. If any shares held by a Representative are not covered by an
effective Form of Irrevocable Election, the beneficial owner of such shares will
not receive the Series A Merger Consideration unless the Series A
8
<PAGE>
Amendment is approved. See "The Mergers and Related Transactions--Merger
Consideration--FHP-- Irrevocable Election by the FHP Preferred Stockholders" in
the Joint Proxy Statement/Prospectus.
F. GENERAL
(1) EXECUTION AND DELIVERY. In order to make an effective Irrevocable
Election, you must correctly fill in the Execution Section of the Form of
Irrevocable Election. After dating and signing it, you are responsible for its
delivery, accompanied by all Certificates (or a proper Guaranty of Delivery of
such Certificates in Box C pursuant to Instruction A), to the Irrevocable
Election Agent at the address set forth on the front of this Form of Irrevocable
Election by the Election Deadline. YOU MAY CHOOSE ANY METHOD TO DELIVER THIS
FORM OF IRREVOCABLE ELECTION. HOWEVER, YOU ASSUME ALL RISK OF NON-DELIVERY. IF
YOU CHOOSE TO USE THE MAIL, IT IS RECOMMENDED THAT YOU USE REGISTERED MAIL,
RETURN RECEIPT REQUESTED, AND THAT YOU PROPERLY INSURE ALL STOCK CERTIFICATES.
DELIVERY OF STOCK CERTIFICATES WILL BE DEEMED EFFECTIVE AND RISK OF LOSS WITH
RESPECT TO SUCH CERTIFICATES SHALL PASS ONLY WHEN SUCH CERTIFICATES ARE ACTUALLY
RECEIVED BY THE IRREVOCABLE ELECTION AGENT.
(2) SIGNATURES. Except as otherwise permitted below, you must sign this
Form of Irrevocable Election exactly the way your name appears on the face of
your Certificates. If the shares are owned by two or more persons, each must
sign exactly as his or her name appears on the face of the Certificates.
(3) NOTICE OF DEFECTS; RESOLUTION OF DISPUTES. Neither FHP nor the
Irrevocable Election Agent will be under any obligation to notify you or anyone
else that the Irrevocable Election Agent has not received a properly completed
Form of Irrevocable Election or that any Form of Irrevocable Election submitted
is defective in any way.
Any and all disputes with respect to an Irrevocable Election (including but
not limited to matters relating to the Election Deadline, time limits, defects
or irregularities in the surrender of any Certificate, and effectiveness of any
Irrevocable Election) will be resolved by FHP and its decision will be
conclusive and binding on all concerned. FHP may delegate this function to the
Irrevocable Election Agent in whole or in part. Each of FHP or the Irrevocable
Election Agent shall have the absolute right in its sole discretion to reject
any and all Forms of Irrevocable Election and surrenders of Certificates which
are deemed by either of them to be not in proper form or to waive any immaterial
irregularities in any Form of Irrevocable Election or in the surrender of any
Certificates. Surrenders of Certificates will not be deemed to have been made
until all defects or irregularities that have not been waived have been cured.
(4) RECEIPT OF PAYMENT. After consummation of the FHP Merger, you will
receive a Letter of Transmittal from the Exchange Agent. Please fill out the
Letter of Transmittal in accordance with its instructions and return it to the
Exchange Agent. The Irrevocable Election Agent will transmit your Certificates
to the Exchange Agent on your behalf.
(5) LOST CERTIFICATES. If you are not able to locate your Certificate(s)
representing FHP Preferred Shares, you should contact American Stock Transfer &
Trust Company, FHP's transfer agent, at (718) 921-8206. In such event, the
transfer agent will forward additional documentation which the stockholder must
complete in order to effectively surrender such lost or destroyed
Certificate(s). There will be a cost to replace lost Certificates.
(6) QUESTIONS AND REQUESTS FOR INFORMATION OR ASSISTANCE. If you have any
questions or need assistance to complete this Form of Irrevocable Election, or
if you wish to obtain additional copies of the Form of Irrevocable Election or
the Joint Proxy Statement/Prospectus, please contact the Irrevocable Election
Agent at (718) 921-8206.
9
