As of September 30, 1996 the Company had leases, in the aggregate, for approximately 1,177,000 square feet of office space for its corporate headquarters, executive offices, regional offices and subsidiary operations in California, Florida, Oklahoma, Oregon, Texas and Washington. Of this aggregate amount, the Company had leases for its corporate headquarters and executive offices of approximately 105,000 square feet in Cypress, California. The Company also had leases, in the aggregate, for approximately 110,000 square feet for computer operations and administrative and warehouse purposes in California.
The Company owns an office building of approximately 200,000 square feet on approximately 9.2 acres of land in Cypress, California which serves as the executive and administrative offices of its California HMO operation. Additionally, the Company owns a child care facility and an office building totaling approximately 30,000 square feet on 2.4 acres of land in Cypress and Tustin, California.
Total health care services expense as a percent of premium revenue (the "medical loss ratio"; See Item 6. Selected Financial Data, page 14) for the fiscal year ended September 30, 1996 increased to 84.4 percent from 83.6 percent in 1995. The commercial medical loss ratio increased to 83.1 percent from 82.5 percent while the government medical loss ratio increased to 85.4 percent from 84.3 percent. The Company controls health care costs through contractual arrangements which capitate providers. Capitation pays providers a fixed monthly fee for each HMO member regardless of the services provided to each member. During the fiscal year, the Company continued its contracting strategy of shifting providers from traditional fee-for-service delivery systems to capitation and risk-sharing arrangements. Accordingly, the percentage of total health care services expense for the fiscal year ended September 30, 1996 representing medical and hospital capitation was 72 percent, an increase from the prior fiscal year's 68 percent.
The increase in the commercial medical loss ratio for the fiscal year ended September 30, 1996 is primarily attributable to increased PPO and indemnity costs of the Company's specialty managed care products and services combined with higher physician and prescription drug costs in the Company's HMOs. Exclusive of the Company's PPO and indemnity products, the commercial medical loss ratio decreased slightly through improved contracting arrangements. Many of the Company's newer markets experienced more membership growth than the Company as a whole. However, with provider networks less sophisticated in managed care, these newer markets contributed to a higher medical loss ratio. The more mature commercial markets experienced slightly improved medical loss ratios from fiscal year 1995. In the commercial program, 62 percent of all health care services expense was capitated with 79 percent of all medical costs and 63 percent of all hospital costs capitated in fiscal year 1996. In the prior fiscal year, total commercial health care services expense was 58 percent capitated, a capitation combination of 78 percent of medical costs and 52 percent of hospital costs.
The increase in the medical loss ratio for the government programs reflects increased physician and hospital costs on a per member basis due to higher membership growth in areas with higher provider costs combined with lower member supplemental premiums and enhanced benefits to enrollees. These increased costs are partially offset by January 1, 1996 HCFA premium rate increases. In the government program, 78 percent of all health care services expense was capitated with 94 percent of medical costs and 78 percent of hospital costs capitated in fiscal year 1996. In the prior fiscal year, total government health care services expense was 75 percent capitated, a capitation combination of 93 percent of medical costs and 72 percent of hospital costs.
In the third quarter, the Company recorded pretax charges of $42.1 million ($27.9 million or $0.88 per share, net of tax). Of the total, $25.0 million ($14.9 million or $0.47 per share, net of tax) was associated with a reserve charge for the Company's commercial contracts with OPM to provide managed health care services to approximately 64,000 members under the Federal Employees Health Benefits Program for Federal employees, annuitants and their dependents; $9.3 million ($8.3 million or $0.26 per share, net of tax) resulted from a pretax loss associated with the sale of the PDS staff-model clinics; and $7.8 million ($4.7 million or $0.15 per share, net of tax) related to a plan for the discontinuation of certain specialty health care products and services and the restructuring of regional operations.
Income exclusive of the impairment, disposition, restructuring and OPM charges described above was $134 million or a 24 percent increase over fiscal year 1995. Earnings per share before impairment, disposition, restructuring and OPM charges, increased 17 percent or $0.61 to $4.23 for the fiscal year ended September 30, 1996. The increases reflect membership growth in both the commercial and government programs and lower marketing, general and administrative costs, partially offset by increases in health care service expenses.
Net income decreased 33 percent to $72.0 million for the fiscal year ended September 30, 1996 compared to $108 million in the same period in fiscal year 1995. Earnings per share of $2.27 were 37 percent lower than the prior fiscal year's earnings per share of $3.62.
of $659 million. Approximately $149 million of the increase in total operating revenue represents the incremental operations of acquisitions described in Note 5 of the Notes to Consolidated Financial Statements. The remaining $30 million was contributed by the Company's specialty managed care products and services and its joint venture medical groups.
The medical loss ratio for the fiscal year ended September 30, 1995, increased to 83.6 percent from 83.1 percent in fiscal year 1994. The commercial medical loss ratio increased to 82.5 percent from 80.5 percent while the government medical loss ratio decreased to 84.3 percent from 85.2 percent. The increase in the commercial medical loss ratio has been driven by the Company's entry into new markets, through acquisitions and internal development, with principally traditional fee-for-service delivery systems. The decrease in the government medical loss ratio is primarily related to more cost effective physician and hospital contracts.
For the fiscal year ended September 30, 1995, earnings per share increased 20 percent to $3.62 compared to $3.02 for fiscal year 1994 before the cumulative effect of a change in accounting principle. The increase is primarily related to membership growth derived substantially from the government programs, predominantly Secure Horizons. Increases in health care service expenses were partially offset by decreases in marketing, general and administrative expenses. The results for the fiscal years ended September 30, 1995 and 1994 included approximately $0.24 and $0.18, respectively, related to the net positive reserve adjustments previously described. Earnings per share for the fiscal year ended September 30, 1994 were $3.22 which included approximately $0.20 due to changes in income tax accounting principles (see Note 2m of the Notes to Consolidated Financial Statements).
Company anticipates that the level of capital expenditures will increase in fiscal year 1997 in connection with the Company's increased investment in the updating and enhancing of its management information systems.
In October 1996, the Company established a $1.5 billion revolving credit facility with Bank of America National Trust and Savings Association and a syndicate of banks (the "Credit Facility") to finance the cash portion of the FHP Transaction or for other corporate purposes (See Note 13 of the Notes to the Consolidated Financial Statements).
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 statements. The statements contained in this section, and throughout the document, are based on current expectations. These statements are forward looking and actual results may differ materially from those projected in the forward looking statements, which statements involve risks and uncertainties. In addition, past financial performance is not necessarily a reliable indicator of future performance and investors should not use historical performance to anticipate results or future period trends. Shareholders are also directed to the other risks discussed in other documents filed by the Company with the Securities and Exchange Commission ("SEC").
INDUSTRY COMPETITION AND CONSOLIDATION. The Company's business strategy is to solidify its position as one of the leading managed health care services companies. The pending FHP Transaction is key to this strategy as it offers significant synergies creating a combined company that 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. While the Company believes that the acquisition will be successfully completed, the regulatory approvals required, including antitrust and various state approvals, as well as shareholder approval required from voting stockholders of both entities may not be obtained. For additional information regarding the FHP Transaction, please refer to the Registration Statement on Form S-4 of PacifiCare Holding filed with the SEC on November 18, 1996. Increased competition could result in a decline in revenue or in price reductions. Factors which could influence increased competition include larger competitors being created through consolidation, intensification of price competition and the formation of new products by new and existing competitors, especially with respect to Medicare products.
MEMBERSHIP GROWTH. Excluding the effects of the FHP Transaction, the Company's membership growth is expected to continue in fiscal year 1997 in both the commercial and government programs but decline from the overall 16 percent growth experienced in fiscal year 1996 as competition continues to increase and the Company shifts its emphasis from rapid growth to improved margin performance in fiscal year 1997. The rate of membership growth is also expected to decline in fiscal year 1997 with approximately 41,000 of expected membership losses with the Company's exit from the Florida market and additional losses as the Company exits the Medicaid business in all markets. If the FHP Transaction is successfully completed, membership growth is expected to double solely as a result of the combination of the two companies. Had the business combination been closed as of September 30, 1996, total membership would have been approximately 3,923,000, an increase of 95 percent. Commercial and government membership would have been 2,921,000 and 1,002,000, respectively. An unforeseen loss of membership could have a material adverse effect on the Company. Factors which could contribute to the loss of membership include without limitation, failure to obtain new customers or to retain existing customers, reductions in workforce by existing customers, adverse publicity and news coverage, inability to carry out marketing and sales plans, loss or
retirement of key executives or key employees or denial of accreditation by independent quality accrediting agencies.
HEALTH CARE PROVIDER CONTRACTS. The Company's profitability depends, in part, on its ability to maintain effective control over health care costs while providing members with quality care. Securing cost effective contracts with existing and new physician groups is more difficult due to increased competition. The negotiation of provider contracts, generally as of January 1, may be impacted by adverse state and federal legislation and regulation discussed below. Factors which could impact the Company's ability to secure contracts with providers include the inability to renegotiate contracts or entering into contracts with less cost-effective rates or terms of payment and factors affecting increased competition as discussed above.
GOVERNMENT MEDICAL LOSS RATIO. In September 1996, the Company was advised by HCFA that effective January 1997, its HMOs will receive a weighted average premium rate increase of approximately 6.1 percent. The Company expects to receive these rates barring any adverse federal legislation change. The fiscal year 1997 medical loss ratio for the government programs is expected to be comparable or slightly higher than the fiscal year 1996 rate as HCFA rate increases are offset by enhanced benefits to enrollees.
OFFICE OF PERSONNEL MANAGEMENT CONTINGENCIES. The Company intends to negotiate with OPM on all matters to attain a mutually satisfactory result. While there is no assurance that the negotiations will be concluded satisfactorily or that additional liability will not be incurred, management believes that any ultimate liability in excess of amounts accrued which could arise upon completion of the audits by OPM of the health plans would not materially affect the
Company's consolidated financial position, results of operations or cash flows, however could be material to net income of a future quarter if resolved unfavorably.
LIQUIDITY AND CAPITAL RESOURCES. The Company believes that the cash flows from operations, the Credit Facility, existing cash and equivalents and marketable securities and other financing sources will be sufficient for the foreseeable future. However, cash flows could be adversely affected by changes in interest rates causing an increase in interest expense and the fact that PacifiCare will be subject to greater operating leverage due to its higher levels of indebtedness if the FHP Transaction is consummated. Additionally, should the Credit Facility be fully drawn to fund the FHP Transaction or other business purpose, the Company's ability to make a payment on, or repayment of, its future obligations under the Credit Facility will be significantly dependent upon the receipt of funds from the Company's subsidiaries. These subsidiary payments represent fees for management services rendered by the Company to the subsidiaries and cash dividends by the subsidiaries to the Company. Nearly all of the subsidiaries are subject to HMO regulations or insurance regulations and may be subject to substantial supervision by one or more HMO or insurance regulators. Subsidiaries subject to regulation must meet or exceed various fiscal standards imposed by HMO or insurance regulations. These fiscal standards may, from time to time, impact the amount of funds paid by subsidiaries to the Company.
LEGISLATION AND REGULATION. The Company's success is significantly impacted by federal and state legislation and regulation. Actual results may differ materially from expected results discussed throughout this document because of adverse state and federal legislation and regulation. This includes 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) and limitations on the ability to manage care and utilization of any willing provider or pharmacy laws. It also includes adverse actions of governmental payors, including unilateral reduction of Medicare and Medicaid premiums payable; discontinuance of or limitation on governmentally-funded programs and recovery by governmental payors of previously paid amounts; the 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; adverse regulatory determinations resulting in loss or limitations of licensure, certification or contracts with governmental payors; and increase by regulatory authorities of minimum capital, reserve and other financial viability requirements.
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Medical claims and benefits payable: Medical claims payable $ 177,600 $ 192,800 Incentives payable to participating medical groups 74,000 80,600 Future life and annuity policy benefits 16,400 15,000 - -------------------------------------------------------------------------------- Total medical claims and benefits payable 268,000 288,400 - -------------------------------------------------------------------------------- Accounts payable 31,082 21,699 Accrued liabilities 92,945 74,685 Accrued compensation and employee benefits 46,930 45,415 Income taxes payable 1,325 7,404 Unearned premium revenue 24,059 195,413 Long-term debt due within one year 6,323 7,978 - -------------------------------------------------------------------------------- Total current liabilities 470,664 640,994 - -------------------------------------------------------------------------------- Long-term debt due after one year 5,183 11,949 Minority interest 391 405 Commitments and contingencies Shareholders' equity: Preferred shares, par value $1.00 per share; 20,000 shares authorized; none issued - - Class A common shares, par value $0.01 per share; 100,000 shares authorized; 12,380 and 12,331 shares issued in 1996 and 1995, respectively 124 123 Class B common shares, par value $0.01 per share; 100,000 shares authorized; 18,912 and 18,551 shares issued in 1996 and 1995, respectively 189 186 Additional paid-in capital 370,442 347,548 Unrealized gains on available-for-sale securities, net of taxes 1,293 4,944 Retained earnings 451,176 379,223 - -------------------------------------------------------------------------------- Total shareholders' equity 823,224 732,024 - -------------------------------------------------------------------------------- $ 1,299,462 $ 1,385,372 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- See accompanying notes.
c) 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 Company's 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 September 30, 1996.
d) FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company's consolidated balance sheets include 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
f) GOODWILL AND INTANGIBLE ASSETS. Goodwill and intangible assets represent principally the unamortized excess of the cost of acquiring subsidiary companies over the fair values of such companies' net tangible assets at the dates of acquisition. Goodwill and intangible assets are amortized on a straight-line basis over periods not exceeding forty years. As of September 30, 1996 and 1995, accumulated amortization totaled $25.2 million and $16.0 million, respectively.
h) SOFTWARE COSTS. Direct costs associated with the development of computer software are expensed as incurred. These costs totaled $12.5 million, $12.1 million and $9.6 million for the fiscal years ended September 30, 1996, 1995 and 1994, respectively.
j) HEALTH CARE SERVICES. The Company's HMOs arrange for comprehensive health care services to their members principally through capitation, a fixed monthly payment made without regard to the frequency, extent or nature of the health care services actually furnished. Benefits are provided to enrolled members generally through the Company's contractual relationships with physician groups and hospitals. The Company's contracted providers may, in turn, contract with specialists or referral providers for specific services and are responsible for any related payments to those referral providers.
The cost of health care provided is accrued in the period it is dispensed to the enrolled members, based in part on estimates for hospital services and other health care costs which have been incurred but not yet reported. The Company has also recorded reserves, based in part on estimates, to indemnify its members against potential referral
As of October 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes" and recorded a benefit for the cumulative effect prior to October 1, 1993 of the change in accounting principle of $5.7 million or approximately $0.20 per share.
n) EARNINGS PER SHARE. Earnings per share are computed on the weighted average number of common shares outstanding each year. Outstanding stock options are common stock equivalents and are included in earnings per share computations.
During the fiscal years ended September 30, 1996 and 1995, proceeds from sales and maturities of marketable securities were $1.4 billion and $2.7 billion, resulting in gross realized gains of $3.9 million and $6.0 million and realized losses of $1.8 million and $6.8 million, respectively. Realized gains and losses are included in interest income under the specific identification method.
The Company completed several acquisitions (the "Acquisitions") in the fiscal years ended September 30, 1996 and 1995. In January 1996, the Company acquired Psychology Systems, Inc., a California-based managed care behavioral health and employee assistance program company with approximately 275,000 covered lives. During fiscal year 1995, the Company made the following acquisitions: (i) Preferred Solutions, a San Jose-based pharmacy benefit management company, in January 1995; (ii) ValuCare, a Fresno, California-based HMO with approximately 67,000 members in March 1995; and (iii) the membership of Pacific Health Plans, a Washington-based HMO, with approximately 33,000 members in March 1995.
As of September 30, 1996, the maturities of long-term debt for the years following 1996 are as follows:
Capitalized leases relate to equipment included in the accompanying consolidated balance sheets at a cost of $17.5 million and $18.4 million at September 30, 1996 and 1995, respectively. Accumulated amortization related to this equipment totaled $15.4 million and $12.8 million at September 30, 1996 and 1995, respectively. These leases require future payments including interest totaling $2.4 million at September 30, 1996 through the end of the lease terms.
In March 1996, the shareholders of the Company approved an amendment (the "Amendment") to the Company's Certificate of Incorporation, as amended (the "Certificate of Incorporation"), to increase the total number of authorized shares of stock which the Company has the authority to issue to 220,000,000. The Amendment increased the number of shares of the Class A Common Stock, which the Company is authorized to issue from 30,000,000 to 100,000,000, increased the number of shares of the Class B Common Stock which the Company is authorized to issue from 60,000,000 to 100,000,000 and increased the total number of shares of preferred stock, par value $1.00 per share (the "Preferred Stock"), which the Company is authorized to issue from 10,000,000 to 20,000,000. Holders of the Class A Common Stock have one vote per share while holders of the Class B Common Stock have no voting rights other than as required by Delaware law. Holders of the Class A
As of March 29, 1995, the Company completed a public offering of 5,175,000 shares of its Class B Common Stock of which 3,000,000 shares were issued and sold by the Company and 2,175,000 shares were sold by UniHealth. The sale of 4,500,000 shares of the Class B Common Stock closed on March 23, 1995 with the sale of the additional 675,000 shares of the Class B Common Stock occurring on March 29, 1995 pursuant to the exercise of the underwriters' over-allotment option.
In December 1994, the Company completed a public offering of 90,000 shares of its Class B Common Stock to certain physician groups which currently contract with the Company. Each group has entered into an irrevocable obligation to purchase a fixed number of shares of the Class B Common Stock over a five year period beginning May 1, 1996 at $64.88 per share. As of September 30, 1996, 14,000 shares had been purchased and 20,000 shares forfeited.
The Company purchased health care services from hospitals owned and managed by UniHealth totaling $73.9 million, $70.6 million and $61.5 million for the fiscal years ended September 30, 1996, 1995 and 1994, respectively. UniHealth purchased health care coverage from the Company in the amounts of $6.5 million, $12.0 million and $10.0 million for the fiscal years ended September 30, 1996, 1995 and 1994, respectively.
SEPTEMBER 30 (IN THOUSANDS) 1996 1995 - -------------------------------------------------------------------------------- Deferred tax assets: Future benefit from goodwill impairment $ 22,637 $ - Accrued health care costs 14,477 15,147 Accrued compensation 11,025 8,682 Accrued expenses 5,107 4,761 Other assets 2,550 485 Depreciation 2,137 693 State franchise taxes 1,779 3,121 Capital leases - 708 - -------------------------------------------------------------------------------- 59,712 33,597
YEARS ENDED SEPTEMBER 30 (in thousands) 1996 1995 1994 - --------------------------------------------------------------------------------
Current: Federal $ 62,781 $ 62,912 $ 58,036 State 13,829 13,927 12,250 - -------------------------------------------------------------------------------- Total current 76,610 76,839 70,286 Deferred: Federal (22,172) (2,444) (9,349) State (3,611) (390) (62) - -------------------------------------------------------------------------------- Total deferred (25,783) (2,834) (9,411) - -------------------------------------------------------------------------------- Provision for income taxes $ 50,827 $ 74,005 $ 60,875 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30 (in thousands) 1996 1995 1994 - -------------------------------------------------------------------------------- Computed expected provision 35.0% 35.0% 35.0% State taxes, net of federal benefit 4.4 4.9 5.4 Tax exempt interest (3.6) (2.2) (1.9) Future benefit from goodwill impairment 1.8 - - Amortization of intangibles 1.5 1.1 0.7 Other, net 2.3 1.8 2.6 - -------------------------------------------------------------------------------- Provision for income taxes 41.4% 40.6% 41.8% - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
a) Savings and Profit-Sharing Plan. The Company has an employee profit- sharing plan (the "Plan") covering substantially all full-time employees, which provides for annual contributions by the Company of two percent of the annual compensation of employees and additional amounts determined by the Board of Directors which are generally based upon a percentage of pretax income. Employees may defer up to twelve percent of their annual compensation under the Plan, with the Company matching one-half of the deferred amount, up to a maximum of three percent of annual compensation. Amounts charged to expense applicable to the Plan were $13.7 million, $14.3 million and $10.3 million for the fiscal years ended September 30, 1996, 1995 and 1994, respectively.
Grants under the 1985 Plan and 1989 Director Plan were suspended. The total number of shares of common stock which may be granted as incentive stock options, non-qualified stock options ("NQSOs"), stock appreciation rights ("SARs") and stock payments under the 1989 Employee Plan as of September 30, 1996 is approximately 980,400. Options may be granted for a term of up to ten years at a price not less than 100 percent of the fair market value of the common stock at the time of grant.
Pretax impairment, disposition, restructuring and OPM charges were recorded for the fiscal year ended September 30, 1996 totaling $100.8 million ($62.0 million or $1.96 per share, net of tax) for the following:
b) Disposition Charge. Effective June 1, 1996, PCFL and its Pasteur Delivery Systems ("PDS") affiliates sold the assets of the PDS staff-model medical clinics to PrimeCare of Florida, Inc. ("PrimeCare"). The transaction
c) Restructuring Charge. The Company recorded a pretax restructuring charge of $7.8 million ($4.7 million, or $0.15 loss per share, net of tax) for the three and nine months ended June 30, 1996. In June 1996, management approved a plan relating to the discontinuation of certain specialty health care products and services that do not meet the Company's strategic and economic return objectives and the restructuring of regional operations, including a reduction in workforce and the completion of regional customer service centers. The restructuring plan was announced to all affected employees prior to June 30, 1996. The expected costs encompass employee separation, ($3.8 million loss, pretax), asset write-offs ($2.5 million loss, pretax) and certain other costs ($1.5 million loss, pretax). These restructuring activities should be substantially completed by March 31, 1997.
d) OPM Charge. The results for the fiscal year ended September 30, 1996 include a pretax charge of $25.0 million ($14.9 million, or $0.47 loss per share, net of tax) for an increase of reserves in anticipation of negotiations relating to potential governmental claims for contracts with the United States Office of Personnel Management ("OPM"). The Company's HMO subsidiaries have commercial contracts with OPM to provide managed health care services to approximately 64,000 members under the Federal Employees Health Benefits Program ("FEHBP") for Federal employees, annuitants and their dependents. 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 the Company's HMO subsidiaries.
The Company intends to negotiate with OPM on all matters to attain a mutually satisfactory result. While there is no assurance that the negotiations will be concluded satisfactorily or that additional liability will not be incurred, management believes that any ultimate liability in excess of amounts accrued which could arise upon completion of the audits by OPM of the health plans, would not materially affect the Company's consolidated financial position, results of operations or cash flows, however, such liability could be material to net income of a future quarter.
YEARS ENDING SEPTEMBER 30 (in thousands) - -------------------------------------------------------------------------------- 1997 $ 24,245 1998 16,887 1999 9,089 2000 4,256 2001 2,536 Thereafter 1,538 - -------------------------------------------------------------------------------- $ 58,551 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
b) EMPLOYMENT AGREEMENTS. The Company has entered into employment agreements with the President of the Company and certain other executive officers. The agreements contain provisions that would entitle each to receive severance benefits which are payable if employment is terminated for various reasons, including termination following a change of ownership or control of the Company as defined by the agreements. The maximum contingent liability for severance payments that the Company would be required to make under the employment agreements (excluding amounts which may be payable under incentive plans and the value of certain benefits) would be approximately $7.1 million at September 30, 1996.
Terms of the FHP Transaction call for holders of FHP common stock to receive a package of consideration equal, at the time of signing, to approximately $35 per share of FHP common stock of which $17.50 per FHP share of common stock will be paid in cash. Holders of FHP common stock will also receive a total of 2,350,000 shares of Class A Common Stock, par value $0.01 per share, of PacifiCare Holding (the "PacifiCare Holding Class A Common Stock") with the remaining consideration to be paid in shares of PacifiCare Holding Class B Common Stock, par value $0.01 per share (the "PacifiCare Holding Class B Common Stock"). Holders of FHP preferred stock will receive either: $14.113 in cash and one half of one share of PacifiCare Holding preferred stock, assuming approval of an amendment to the FHP Restated Certificate of Incorporation (or an irrevocable election by the holder of FHP is made); or if the amendment is not approved (or an irrevocable election by the holder of FHP preferred stock is not made) (a) $25.00 in cash, (b) a mix of cash, PacifiCare Holding Class A and Class B Common Stock determined by a formula described in the agreement and plan of reorganization, or (c) 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 FHP Transaction.
The FHP Transaction is subject to various federal and state regulatory approvals, approval of the Company's and FHP's shareholders and other customary conditions and is expected to close in January 1997. For additional information regarding the proposed transaction, please refer to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission on November 18, 1996.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PacifiCare Health Systems, Inc. at September 30, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 1996 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
(2) The June 30, 1996 results include $42.1 million of pretax charges ($27.9 million or $0.88 loss per share, net of tax) for potential government claims, the disposition of Pasteur Delivery Systems and certain restructuring charges
(3) The September 30, 1996 results include $58.7 million of pretax charges ($34.1 million or $1.08 per share, net of tax) for the impairment of goodwill of the Florida operations.