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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-12718
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HEALTH NET, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4288333
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
21650 OXNARD STREET, 91367
WOODLAND HILLS, CA (Zip Code)
(Address of principal executive offices)
(818) 676-6978
(Registrant's telephone number, including area code)
FOUNDATION HEALTH SYSTEMS, INC.
(Former Name)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: The number of shares outstanding
of the registrant's Class A Common Stock as of November 6, 2000 was 122,463,038
(excluding 3,194,374 shares held as treasury stock) and no shares of Class B
Common Stock were outstanding as of such date.
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HEALTH NET, INC.
INDEX TO FORM 10-Q
PAGE
--------
PART I--FINANCIAL INFORMATION
Item 1--Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999............... 3
Condensed Consolidated Statements of Operations for the
Third Quarter Ended September 30, 2000 and 1999........ 4
Condensed Consolidated Statements of Operations for the
Nine Months Ended September 30, 2000 and 1999.......... 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999.......... 6
Notes to Condensed Consolidated Financial Statements.... 7
Item 2--Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 18
Item 3--Quantitative and Qualitative Disclosures About
Market Risk............................................... 25
PART II--OTHER INFORMATION
Item 1--Legal Proceedings................................... 27
Item 2--Changes in Securities............................... 30
Item 3--Defaults Upon Senior Securities..................... 31
Item 4--Submission of Matters to a Vote of Security
Holders................................................... 31
Item 5--Other Information................................... 31
Item 6--Exhibits and Reports on Form 8-K.................... 33
Signatures.................................................. 38
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTH NET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 876,278 $1,010,539
Investments--available for sale........................... 479,079 456,603
Premiums receivable, net.................................. 152,305 149,992
Amounts receivable under government contracts............. 358,247 290,329
Deferred taxes............................................ 145,402 209,037
Reinsurance and other receivables......................... 153,090 153,427
Other assets.............................................. 70,479 77,866
---------- ----------
Total current assets.................................... 2,234,880 2,347,793
Property and equipment, net................................. 276,071 280,729
Goodwill and other intangible assets, net................... 871,496 909,586
Other noncurrent assets..................................... 107,082 158,373
---------- ----------
Total Assets............................................ $3,489,529 $3,696,481
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Reserves for claims and other settlements................. $1,168,505 $1,138,801
Unearned premiums......................................... 75,008 224,381
Notes payable and capital leases.......................... 450 1,256
Amounts payable under government contracts................ 2,628 43,843
Accounts payable and other liabilities.................... 246,981 322,048
---------- ----------
Total current liabilities............................... 1,493,572 1,730,329
Notes payable and capital leases............................ 946,445 1,039,352
Deferred taxes.............................................. 8,933 5,624
Other noncurrent liabilities................................ 28,646 29,977
---------- ----------
Total Liabilities....................................... 2,477,596 2,805,282
---------- ----------
Commitments and contingencies
Stockholders' Equity:
Common stock and additional paid-in capital............... 644,730 643,498
Retained earnings......................................... 464,998 347,601
Treasury Class A common stock, at cost.................... (95,831) (95,831)
Accumulated other comprehensive loss...................... (1,964) (4,069)
---------- ----------
Total Stockholders' Equity.............................. 1,011,933 891,199
---------- ----------
Total Liabilities and Stockholders' Equity.............. $3,489,529 $3,696,481
========== ==========
See accompanying notes to condensed consolidated financial statements.
3
HEALTH NET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THIRD QUARTER ENDED
SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
REVENUES
Health plan premiums...................................... $1,847,400 $1,761,510
Government contracts/Specialty services................... 414,279 372,778
Investment and other income............................... 26,136 22,632
---------- ----------
Total revenues.......................................... 2,287,815 2,156,920
---------- ----------
EXPENSES
Health plan services...................................... 1,575,723 1,495,784
Government contracts/Specialty services................... 283,306 244,326
Selling, general and administrative....................... 310,576 321,608
Depreciation.............................................. 16,423 17,574
Amortization.............................................. 9,675 10,505
Interest.................................................. 22,736 20,737
Restructuring and other costs............................. -- (4,500)
Net gain on sale of businesses and properties............. (1,068) (7,455)
---------- ----------
Total expenses.......................................... 2,217,371 2,098,579
---------- ----------
Income before income tax provision.......................... 70,444 58,341
Income tax provision........................................ 25,797 23,252
---------- ----------
Net income.................................................. $ 44,647 $ 35,089
========== ==========
Basic and diluted earnings per share........................ $ 0.36 $ 0.29
========== ==========
Weighted average shares outstanding:
Basic....................................................... 122,477 122,310
Diluted..................................................... 124,188 122,733
See accompanying notes to condensed consolidated financial statements.
4
HEALTH NET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
REVENUES
Health plan premiums...................................... $5,430,967 $5,277,588
Government contracts/Specialty services................... 1,211,813 1,105,882
Investment and other income............................... 73,970 60,783
---------- ----------
Total revenues.......................................... 6,716,750 6,444,253
---------- ----------
EXPENSES
Health plan services...................................... 4,628,738 4,472,846
Government contracts/Specialty services................... 810,663 725,220
Selling, general and administrative....................... 944,558 962,969
Depreciation.............................................. 50,375 52,350
Amortization.............................................. 28,979 32,033
Interest.................................................. 66,003 63,332
Restructuring and other costs............................. -- 16,559
Net gain on sale of businesses and properties............. (1,068) (64,725)
---------- ----------
Total expenses.......................................... 6,528,248 6,260,584
---------- ----------
Income before income tax provision and cumulative effect of
a change in accounting principle.......................... 188,502 183,669
Income tax provision........................................ 71,105 73,273
---------- ----------
Income before cumulative effect of a change in accounting
principle................................................. 117,397 110,396
Cumulative effect of a change in accounting principle, net
of tax.................................................... -- (5,417)
---------- ----------
Net income.................................................. $ 117,397 $ 104,979
========== ==========
Basic and diluted earnings per share:
Income before cumulative effect of a change in accounting
principle................................................. $ 0.96 $ 0.91
Cumulative effect of a change in accounting principle....... -- (0.05)
---------- ----------
Net income.................................................. $ 0.96 $ 0.86
========== ==========
Weighted average shares outstanding:
Basic....................................................... 122,435 122,274
Diluted..................................................... 122,625 122,431
See accompanying notes to condensed consolidated financial statements.
5
HEALTH NET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
---------- ---------
OPERATING ACTIVITIES:
Net income.................................................. $ 117,397 $ 104,979
Adjustments to reconcile net income to net cash used in
operating activities:
Amortization and depreciation............................. 79,354 84,383
Net gain on sale of businesses and buildings.............. (1,068) (64,725)
Cumulative effect of a change in accounting principle..... -- 5,417
Restructuring and other costs............................. -- 16,559
Other changes............................................. 8,885 4,855
Changes in assets and liabilities, net of effect of
dispositions:
Premiums receivable..................................... (2,313) 21,778
Unearned premiums....................................... (149,373) (195,150)
Other assets............................................ 47,748 84,051
Amounts receivable/payable under government contracts... (109,133) 5,542
Reserves for claims and other settlements............... 29,704 72,229
Accounts payable and other liabilities.................. (48,077) (175,623)
---------- ---------
Net cash flows used in operating activities................. (26,876) (35,705)
---------- ---------
INVESTING ACTIVITIES:
Sales or maturities of investments.......................... 209,518 504,713
Purchases of investments.................................... (153,495) (519,092)
Net purchases of property and equipment..................... (50,364) (26,478)
Net proceeds from the sale of businesses and properties..... 3,505 126,568
Other....................................................... (24,076) 29,989
---------- ---------
Net cash flows (used in) provided by investing activities... (14,912) 115,700
---------- ---------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock
purchases................................................. 1,233 1,216
Proceeds from issuance of notes payable and other financing
arrangements.............................................. 155,032 141,275
Repayment of debt and other noncurrent liabilities.......... (248,738) (310,433)
---------- ---------
Net cash flows used in financing activities................. (92,473) (167,942)
---------- ---------
Net decrease in cash and cash equivalents................... (134,261) (87,947)
Cash and cash equivalents, beginning of period.............. 1,010,539 763,865
---------- ---------
Cash and cash equivalents, end of period.................... $ 876,278 $ 675,918
========== =========
See accompanying notes to condensed consolidated financial statements.
6
HEALTH NET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Following the rules and regulations of the Securities and Exchange
Commission ("SEC"), Health Net, Inc. (formerly named Foundation Health
Systems, Inc.) (together with its subsidiaries, the "Company") has omitted
footnote disclosures that would substantially duplicate the disclosures
contained in the Company's annual audited financial statements. The unaudited
condensed consolidated financial statements should be read together with the
consolidated financial statements and the notes included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments, consisting solely of normal recurring adjustments,
needed to present fairly the financial results of operations and cash flows for
the interim periods presented in accordance with generally accepted accounting
principles in the United States of America. Results of operations for the
interim periods are not necessarily indicative of results for a full year.
Certain 1999 amounts have been reclassified to conform to the 2000
presentation. The reclassifications have no effect on net earnings or
stockholders' equity as previously reported.
2. RESTRUCTURING AND OTHER COSTS
The principal components of restructuring and other costs for the nine
months ended September 30 are as follows (amounts in millions):
1999
--------
Severance and benefit related costs......................... $18.5
Real estate lease termination costs......................... 0.8
Other costs................................................. 1.8
-----
21.1
Modifications to prior year restructuring plans............. (4.5)
-----
Total....................................................... $16.6
=====
7
HEALTH NET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. RESTRUCTURING AND OTHER COSTS (CONTINUED)
1999 CHARGES
The following tables summarize the 1999 charges by quarter and by type
(amounts in millions):
1999 ACTIVITY
1999 NET ------------------- BALANCE AT
1999 MODIFICATIONS 1999 CASH DECEMBER 31,
CHARGES TO ESTIMATE CHARGES PAYMENTS NON-CASH 1999
-------- ------------- -------- -------- -------- -------------
Severance and benefit related costs..... $18.5 $(1.3) $17.2 $ (8.6) $ -- $8.6
Asset impairment costs.................. 6.2 -- 6.2 -- (6.2) --
Real estate lease termination costs..... 0.8 -- 0.8 (0.8) -- --
Other costs............................. 1.8 (0.1) 1.7 (1.4) -- 0.3
----- ----- ----- ------ ----- ----
Total................................... $27.3 $(1.4) $25.9 $(10.8) $(6.2) $8.9
===== ===== ===== ====== ===== ====
First Quarter 1999 Charge............... $21.1 $(1.4) $19.7 $(10.8) $ -- $8.9
Fourth Quarter 1999 Charge.............. 6.2 -- 6.2 -- (6.2) --
----- ----- ----- ------ ----- ----
Total................................... $27.3 $(1.4) $25.9 $(10.8) $(6.2) $8.9
===== ===== ===== ====== ===== ====
2000
ACTIVITY
BALANCE AT -------- BALANCE AT EXPECTED
DECEMBER 31, CASH SEPTEMBER 30, FUTURE CASH
1999 PAYMENTS 2000 OUTLAYS
------------- -------- -------------- -----------
Severance and benefit related costs............ $8.6 $(7.6) $1.0 $1.0
Asset impairment costs......................... -- -- -- --
Real estate lease termination costs............ -- -- -- --
Other costs.................................... 0.3 (0.3) -- --
---- ----- ---- ----
Total.......................................... $8.9 $(7.9) $1.0 $1.0
==== ===== ==== ====
First Quarter 1999 Charge...................... $8.9 $(7.9) $1.0 $1.0
Fourth Quarter 1999 Charge..................... -- -- -- --
---- ----- ---- ----
Total.......................................... $8.9 $(7.9) $1.0 $1.0
==== ===== ==== ====
During the fourth quarter of 1998, the Company initiated a formal plan to
dispose of certain health plans of the Company's then Central Division included
in the Company's Health Plan Services segment in accordance with its anticipated
divestitures program. In this connection, the Company announced its plan to
close the Colorado regional processing center, terminate employees and transfer
these operations to the Company's other administrative facilities. In addition,
the Company announced its plans to consolidate certain administrative functions
in its Oregon and Washington health plan operations. During the first and fourth
quarters ended March 31, 1999 and December 31, 1999, the Company recorded pretax
charges for restructuring and other charges of $21.1 million (the "1999
Charges") and asset impairment charges of $6.2 million, respectively.
SEVERANCE AND BENEFIT RELATED COSTS--The 1999 Charges included
$18.5 million for severance and benefit costs related to executives and
operations employees at the Colorado regional
8
HEALTH NET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. RESTRUCTURING AND OTHER COSTS (CONTINUED)
processing center and operations employees at the Oregon and Washington health
plans. The operations functions included premium accounting, claims, medical
management, customer service, sales and other related departments. The 1999
Charges included the termination of a total of 773 employees. As of
September 30, 2000, termination of employees is substantially completed,
$16.2 million had been recorded as severance under this plan and $1.0 million is
expected to require future cash outlays. Termination of the remaining seven
employees is expected to be completed during the fourth quarter of 2000.
Modifications to the initial estimate of $1.3 million were recorded during the
fourth quarter of 1999. No further adjustments to the original estimates have
been recorded through September 30, 2000.
ASSET IMPAIRMENT COSTS--During the fourth quarter ended December 31, 1999,
the Company recorded asset impairment costs totaling $6.2 million related to
impairment of certain long-lived assets held for disposal. These charges
included a further adjustment of $4.7 million to adjust the carrying value of
the Company's Ohio, West Virginia and Western Pennsylvania operations health
plans to fair value (originally impaired in 1998) and an adjustment of
$1.5 million to adjust the carrying value of its subacute care management
operations. The revenue and pretax income attributable to these operations were
$46.6 million and $0.1 million, respectively, for the nine months ended
September 30, 2000. The carrying value of these net assets as of September 30,
2000 was $16.5 million.
REAL ESTATE LEASE TERMINATION AND OTHER COSTS--The 1999 Charges included
$2.6 million to terminate real estate obligations and other costs to close the
Colorado regional processing center.
1998 CHARGES
In connection with the Company's 1998 restructuring plans, severance, asset
impairment and other costs totaling $240.1 million were recorded during the year
ended December 31, 1998. The 1998 restructuring plans were completed at the end
of 1999.
On July 19, 1998, FPA Medical Management, Inc. ("FPA") filed for bankruptcy
protection under Chapter 11 of the Bankruptcy Code. The FPA bankruptcy and
related events and circumstances caused management to re-evaluate the decision
to continue to operate 14 facilities previously leased to FPA and management
determined to sell the properties. As part of the 1998 Charges, the Company
recorded $84.1 million of asset impairment costs related to the 14 properties
and other costs related to FPA. As of September 30, 2000, 12 of these properties
have been sold. The remaining properties are expected to be sold during 2001.
The carrying value of the assets held for disposal totaled $9.9 million at
September 30, 2000. The results of operations attributable to such real estate
assets were immaterial for the nine months ended September 30, 2000 and 1999.
As part of the 1998 restructuring plans, the Company initiated a formal plan
to dispose of certain health plans of the Company's then Central Division
included in the Company's Health Plan Services segment in accordance with its
anticipated divestitures program. The Company sold and/or transitioned to third
parties a majority of the business of these health plans in 1999. In 1998, the
Company recorded asset impairment charges of $112.4 million related to these
plans. As discussed under "1999 Charges", further adjustments to carrying value
of $4.7 million were recorded in 1999. During the third quarter ended
September 30, 1999, a $4.5 million modification to the initial estimate of an
obligation associated
9
HEALTH NET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. RESTRUCTURING AND OTHER COSTS (CONTINUED)
with the disposal of a building which was included in asset impairment charges
was recorded. Revenues and pretax losses attributable to these health plans were
$7.6 million and $0.5 million, respectively, for the nine months ended
September 30, 2000. The carrying value of these net assets as of September 30,
2000 was $8.8 million.
3. COMPREHENSIVE INCOME
Comprehensive income for the third quarter and nine months ended
September 30 is as follows (amounts in thousands):
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
Net income............................ $44,647 $35,089 $117,397 $104,979
Other comprehensive income, net of tax
Net change in unrealized
appreciation
on available-for-sale
investments......................... 1,878 8,439 2,105 5,337
------- ------- -------- --------
Comprehensive income.................. $46,525 $43,528 $119,502 $110,316
======= ======= ======== ========
4. EARNINGS PER SHARE
Basic earnings per share excludes dilution and reflects income divided by
the weighted average shares of common stock outstanding during the periods
presented. Diluted earnings per share is based upon the weighted average shares
of common stock and dilutive common stock equivalents (all of which are
comprised of stock options) outstanding during the periods presented; no
adjustment to income is required. Common stock equivalents arising from dilutive
stock options are computed using the treasury stock method. There were 1,711,000
and 190,000 shares of common stock equivalents for the third quarter and nine
months ended September 30, 2000, respectively, and 423,000 and 157,000 shares of
common stock equivalents for the third quarter and nine months ended
September 30, 1999, respectively. During the third quarter ended September 30,
2000, approximately 1.5 million weighted average common stock equivalents became
dilutive.
10
HEALTH NET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. SEGMENT INFORMATION
Presented below are segment data for the third quarter and nine months ended
September 30, 2000 and 1999 (amounts in thousands):
GOVERNMENT
CONTRACTS/
HEALTH PLAN SPECIALTY CORPORATE
SERVICES SERVICES AND OTHER TOTAL
----------- ---------- --------- ----------
THIRD QUARTER ENDED SEPTEMBER 30, 2000
Revenues from external sources.................... $1,847,400 $ 414,279 $ 26,136 $2,287,815
Intersegment revenues............................. 4,857 68,355 -- 73,212
Income (loss) before income taxes................. 55,971 60,267 (45,794) 70,444
Segment assets.................................... 2,491,063 772,597 225,869 3,489,529
THIRD QUARTER ENDED SEPTEMBER 30, 1999
Revenues from external sources.................... $1,761,510 $ 372,778 $ 22,632 $2,156,920
Intersegment revenues............................. 2,026 91,194 -- 93,220
Income (loss) before income taxes................. 68,078 31,543 (41,280) 58,341
Segment assets.................................... 2,468,454 683,412 356,305 3,508,171
NINE MONTHS ENDED SEPTEMBER 30, 2000
Revenues from external sources.................... $5,430,967 $1,211,813 $ 73,970 $6,716,750
Intersegment revenues............................. 11,543 169,590 -- 181,133
Income (loss) before income taxes................. 171,147 119,313 (101,958) 188,502
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues from external sources.................... $5,277,588 $1,105,882 $ 60,783 $6,444,253
Intersegment revenues............................. 6,864 258,398 -- 265,262
Income (loss) before income taxes and cumulative
effect of change in accounting principle........ 112,300 86,502 (15,133) 183,669
SEGMENT ASSETS AS OF DECEMBER 31, 1999............ $2,598,582 $ 796,358 $301,541 $3,696,481
6. CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1999, the Company adopted Statement of Position 98-5
"Reporting on the Costs of Start-Up Activities" and changed its method of
accounting for start-up and organization costs. The change involved expensing
these costs as incurred, rather than the Company's previous accounting principle
of capitalizing and subsequently amortizing such costs. The change in accounting
principle resulted in the write-off of the costs capitalized as of January 1,
1999. The cumulative effect of the write-off was $5.4 million (net of tax
benefit of $3.7 million) and has been expensed and reflected in the condensed
consolidated statement of operations for the nine months ended September 30,
1999.
7. DISPOSITION OF ASSETS
During the third quarter ended September 30, 2000, the Company sold property
in California and received cash proceeds of $3.5 million and recognized a gain
of $1.1 million, before taxes.
During the third quarter ended September 30, 1999, the Company completed the
sale of its HMO operations in New Mexico, its two California hospitals, one of
its bill review subsidiaries and a building
11
HEALTH NET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. DISPOSITION OF ASSETS (CONTINUED)
located in Colorado. For the sales of these businesses and building, the Company
received net cash proceeds of $43.1 million and notes receivable of
$12.2 million and recognized a net gain of $7.5 million, before taxes.
During the first and second quarter of 1999, the Company completed the sale
of certain of its pharmacy benefit management assets, its HMO operations in the
states of Texas, Louisiana and Oklahoma and its preferred provider organization
network subsidiary and various buildings. As part of these transactions, the
Company received cash proceeds of $83.5 million, $10.7 million of convertible
preferred stock and recognized a net gain of $57.2 million, before taxes.
During the fourth quarter of 1999, the Company sold its Washington HMO
subsidiary to American Family Care, Inc. and entered into definitive agreements
with PacifiCare of Washington, Inc. and Premera Blue Cross to transition the
Company's commercial membership in Washington. During the fourth quarter of
1999, the Company also entered into a definitive agreement with PacifiCare of
Colorado, Inc. to transition the Company's HMO membership in Colorado. As of
September 30, 2000, the transitions were completed. During the fourth quarter of
1999, the Company also completed the sale of its HMO operations in Utah.
8. COMMITMENTS AND CONTINGENCIES
In 1997, the Company purchased convertible and nonconvertible debentures of
FOHP, Inc., a New Jersey corporation ("FOHP"), in the aggregate principal
amounts of approximately $80.7 million and $24.0 million, respectively. In 1997
and 1998, the Company converted certain of the convertible debentures into
shares of Common Stock of FOHP, resulting in the Company owning 99.6% of the
outstanding common stock of FOHP. The nonconvertible debentures mature on
December 31, 2002.
Effective January 1, 1999, Physicians Health Services of New Jersey, Inc., a
New Jersey HMO wholly-owned by the Company, merged with and into First Option
Health Plan of New Jersey ("FOHP-NJ"), a New Jersey HMO subsidiary of FOHP, and
FOHP-NJ changed its name to Physicians Health Services of New Jersey, Inc.
("PHS-NJ"). Effective July 30, 1999, upon approval by the stockholders of FOHP
at a special meeting, a wholly-owned subsidiary of the Company merged into FOHP
and FOHP became a wholly-owned subsidiary of the Company. In connection with the
merger, the former minority shareholders of FOHP are entitled to either $0.25
per share (the value per FOHP share as of December 31, 1998 as determined by an
outside appraiser) or payment rights which entitle the holders to receive as
much as $15.00 per payment right on or about July 1, 2001, provided certain
hospital and other provider participation conditions are met. Additional
consideration of $2.25 per payment right will be paid to certain holders of the
payment rights if PHS-NJ achieves certain annual returns on common equity and
the participation conditions are met.
The Company leases office space under various operating leases. On
September 20, 2000, Health Net of California, Inc., a wholly-owned subsidiary of
the Company, entered into an operating lease agreement to lease office space in
Woodland Hills, California for substantially all of its operations once its
current office lease expires. The new lease is anticipated to commence on
January 1, 2002 for a term of ten years. The total future minimum lease
commitments under the lease are approximately $96.7 million.
12
HEALTH NET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In 1995, the Company entered into a five year tax retention operating lease
for the construction of various health care centers and a corporate facility.
Upon expiration in July of 2000, the lease was extended for two months through
September 2000 whereupon the Company settled its obligations under the agreement
and purchased the leased properties comprised of three rental health care
centers and a corporate facility for $35.4 million. The health care centers are
held as investment rental properties and are included in other noncurrent
assets. The corporate facility building is used in operations and included in
property and equipment. The buildings will be depreciated over a useful life of
35 years.
Effective January 1, 2001, subject to adoption of the codification of
statutory accounting principles by the various states, the amount of capital
contributions required to meet risk-based capital and other minimum capital
requirements at the Company's various regulated subsidiaries may change. The
Company is currently in the process of evaluating the effect of such
codification on its regulated subsidiaries capital and surplus positions.
9. LEGAL PROCEEDINGS
In April 2000, a lawsuit was filed against the Company and its wholly-owned
subsidiary, Foundation Health Corporation ("FHC") in the United States
Bankruptcy Court for the Central District of California. The lawsuit relates to
the 1998 sale of Business Insurance Group, Inc., a holding company of workers'
compensation companies operating primarily in California ("BIG"), by FHC to
Superior National Insurance Group, Inc. ("Superior"). In March 2000, the
California Department of Insurance seized BIG and Superior's other California
insurance subsidiaries. On April 26, 2000, Superior filed for bankruptcy. Two
days later, Superior filed its lawsuit against the Company, FHC and Milliman &
Robertson ("M&R"). Superior alleges that the BIG transaction was a fraudulent
transfer under federal and California bankruptcy laws in that Superior did not
receive reasonably equivalent value for the $285 million in consideration paid
for BIG; that the Company, FHC and M&R defrauded Superior by making
misstatements as to the adequacy of BIG's reserves; that Superior is entitled to
rescind its purchase of BIG; that Superior is entitled to indemnification for
losses it allegedly incurred in connection with the BIG transaction; that FHC
breached the Stock Purchase Agreement; and that FHC and the Company were guilty
of California securities laws violations in connection with the sale of BIG.
Superior seeks $300 million in compensatory damages, unspecified punitive
damages and the costs of the action, including attorneys' fees. In August, 2000,
a motion filed by the Company and FHC to remove the lawsuit from the
jurisdiction of the Bankruptcy Court to the United States District Court for the
Central District of California was granted, and the lawsuit is now pending in
the District Court. The parties are currently engaged in discovery. The Company
believes that Superior's claims have no merit and intends to defend itself
vigorously in this litigation.
Since May 1998, several complaints (the "FPA Complaints") have been filed in
federal and state courts seeking an unspecified amount of damages on behalf of
an alleged class of persons who purchased shares of common stock, convertible
subordinated debentures and options to purchase common stock of FPA Medical
Management, Inc. ("FPA") at various times between February 3, 1997 and May 15,
1998. The FPA Complaints name as defendants FPA, certain of FPA's auditors, the
Company and certain of the Company's former officers. The FPA Complaints allege
that the Company and such former officers violated federal and state securities
laws by misrepresenting and failing to
13
HEALTH NET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. LEGAL PROCEEDINGS (CONTINUED)
disclose certain information about a 1996 transaction between the Company and
FPA, about FPA's business and about the Company's 1997 sale of FPA common stock
held by the Company. All claims against the Company's former officers were
voluntarily dismissed from the consolidated class actions in both federal and
state court. The Company has filed a motion to dismiss all claims asserted
against it in the consolidated federal class actions but has not formally
responded to the other complaints. Management believes these suits against the
Company are without merit and intends to vigorously defend the actions.
Physicians Health Services, Inc. ("PHS"), a subsidiary of the Company, was
sued on December 14, 1999 in the United States District Court in Connecticut by
the Attorney General of Connecticut acting on behalf of a group of state
residents. The lawsuit was premised on the federal Employee Retirement Income
Security Act ("ERISA"), and alleged that PHS violated its duties under that Act
by managing its prescription drug formulary in a manner that served its own
financial interest rather than those of plan beneficiaries. The suit sought to
have PHS revamp its formulary system, and to provide patients with written
denial notices and instructions on how to appeal. PHS filed a motion to dismiss
which asserted that the state residents the Attorney General purported to
represent all received a prescription drug appropriate for their conditions and
therefore suffered no injuries whatsoever, that his office lacked standing to
bring the suit and that the allegations failed to state a claim under ERISA. On
July 12, 2000, the court granted PHS' motion and dismissed the action. The State
of Connecticut has filed an appeal.
In September 1983, a lawsuit was filed in Los Angeles Superior Court by
Baja Inc. ("Baja") against East Los Angeles Doctors Hospital Foundation, Inc.
("Hospital") and Century Medicorp ("Century") arising out of a multi-phase
written contract for operation of a pharmacy at the Hospital during the period
September 1978 through September 1983. In October 1992, Foundation Health
Corporation, now a subsidiary of the Company, acquired the Hospital and Century,
and thereafter continued the vigorous defense of this action. In August 1993,
the Court awarded Baja $549,532 on a portion of its claim. In December 1994, the
Court concluded that Baja also could seek certain additional damages subject to
proof. On July 5, 1995, the Court awarded Baja an additional $1,015,173 (plus
interest) in lost profits damages. In October 1995, both of the parties
appealed. The Court of Appeal reversed portions of the judgment, directing the
trial court to conduct additional hearings on Baja's damages. In January 2000,
after further proceedings on the issue of Baja's lost profits, the Court awarded
Baja $4,996,019 in addition to the previous amounts, plus prejudgment interest.
In June 2000, the Company filed an appeal of the Court's final judgment. The
parties have engaged in preliminary settlement discussions.
OTHER CLASS ACTIONS
On November 22, 1999, a complaint was filed in the United States District
Court for the Southern District of Mississippi in a lawsuit entitled Pay v.
Foundation Health Systems, Inc. The two count complaint seeks certification of a
nationwide class action and alleges that cost containment measures used by the
Company's health maintenance organizations, preferred provider organizations and
point-of-service health plans violate provisions of the federal Racketeer
Influenced and Corrupt Organizations Act ("RICO") and ERISA. The action seeks
unspecified damages and injunctive relief. The case was stayed on January 25,
2000, pending the resolution of various procedural issues involving
14
HEALTH NET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. LEGAL PROCEEDINGS (CONTINUED)
similar actions filed against Humana, Inc. in the Southern District of Florida.
In June 2000, the plaintiffs filed an amended complaint in the Humana action to
add claims against other managed care organizations, including the Company. On
October 23, 2000, Court allowed the plaintiffs to amend the complaint alleging
claims against the Company to add two named plaintiffs and withdraw the
originally named plaintiff from the action. Consequently, the case is now
entitled Romero V. Foundation Health Systems, Inc. Management believes the suit
against the Company is without merit and intends to vigorously defend the
action.
In May 2000, the California Medical Association filed a lawsuit, purportedly
on behalf of its member physicians, in the United States District Court for the
Northern District of California against several managed care organizations,
including the Company, entitled California Medical Association v. Blue Cross of
California, Inc., Pacificare Health Systems, Inc., Pacificare Operations, Inc.
and Foundation Health Systems, Inc. The plaintiff alleges that the manner in
which the defendants contract and interact with its member physicians violates
provisions of RICO. The action seeks declaratory and injunctive relief, as well
as costs and attorneys fees. The Company filed a motion to dismiss the action on
various grounds. In August 2000, plaintiffs in other actions pending against
different managed care organizations petitioned the Judicial Panel on
Multi-District Litigation to consolidate the California action with the other
actions in the United States District Court for the Northern District of
Alabama. In light of the pending petition, the California court stayed the
action and the hearing on the Company's motion to dismiss the complaint pending
a determination of the petition to consolidate. Management believes the suit
against the Company is without merit and intends to vigorously defend the
action.
On August 17, 2000, a complaint was filed in the United States District
Court for the Southern District of Florida in a lawsuit entitled Shane v.
Humana, Inc., et al. (including Foundation Health Systems, Inc.). The complaint
seeks certification of a nationwide class action on behalf of physicians and
alleges that the defendant managed care companies' methods of reimbursing
physicians violate provisions of ERISA, RICO and various state laws. The action
seeks unspecified damages and injunctive relief. Management believes the suit
against the Company is without merit and intends to vigorously defend the
action.
On September 7, 2000, the Attorney General of Connecticut filed a lawsuit
against Physicians Health Services of Connecticut, Inc. This suit names
Foundation Health Systems, Inc., Anthem Blue Cross and Blue Shield of CT, Anthem
Health Plans, Inc., CIGNA Healthcare of CT, Inc., Oxford Health Plans of
CT, Inc. as defendants, and asserts claims against PHS and the Company that are
similar, if not identical, to those asserted in the previous lawsuit that was
dismissed on July 12, 2000. Management believes the suit against the Company is
without merit and intends to vigorously defend the action.
On September 7, 2000, a complaint was filed in the United States District
Court for the District of Connecticut in a lawsuit entitled Albert v. CIGNA
Healthcare of Connecticut, Inc., et al. (including Physicians Health Services of
Connecticut, Inc. and Foundation Health Systems, Inc.). The complaint seeks
certification of a nationwide class action and alleges that the defendant
managed care companies' various practices violate provisions of ERISA. The
action seeks unspecified damages and injunctive relief.
15
HEALTH NET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. LEGAL PROCEEDINGS (CONTINUED)
On October 23, 2000, the Judicial Panel on Multi-District Litigation ruled
that the foregoing class actions should be consolidated, for purposes of
pre-trial proceedings only, with other cases pending against managed care
organizations in the United States District Court for the Southern District of
Florida in Miami. It is anticipated that orders formally transferring the above
class actions for pre-trial purposes to the United States District Court for the
Southern District of Florida in Miami will issue soon. Management believes the
foregoing class actions against the Company are without merit and intends to
vigorously defend the actions.
The Company and certain of its subsidiaries are also parties to various
other legal proceedings, many of which involve claims for coverage encountered
in the ordinary course of its business. Based in part on advice from litigation
counsel to the Company and upon information presently available, management of
the Company is of the opinion that the final outcome of all such proceedings
should not have a material adverse effect upon the Company's results of
operations or financial condition.
10. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 140 ("SFAS 140"), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities (a replacement of FASB Statement No. 125)." SFAS 140 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities. Those standards are based on
consistent application of a financial-components approach that focuses on
control. SFAS 140 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after March 31, 2001. SFAS 140 is
effective for recognition and reclassification of collateral and for related
disclosures for fiscal years ending after December 15, 2000. The Company does
not expect SFAS 140 to have a material effect on its consolidated financial
position or results of operations.
In March 2000, the FASB issued Interpretation No. 44, ("Interpretation 44")
"Accounting for Certain Transactions Involving Stock Compensation."
Interpretation 44 provides guidance on certain implementation issues related to
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees." Interpretation 44 was effective July 1, 2000 and did not have a
material impact on the Company's consolidated financial position or results of
operations.
In December 1999, the Securities and Exchange Commission issued, then
subsequently amended, Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements." SAB 101, as amended, provides guidance on
applying generally accepted accounting principles to revenue recognition issues
in financial statements. The Company is required to adopt SAB 101 in the quarter
ended December 31, 2000. The Company does not expect the adoption of SAB 101 to
have a material effect on its consolidated financial position or results of
operations.
In June 1998, the FASB issued, then subsequently amended, Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133, as amended by Statement of
Financial Accounting Standards No. 138 ("SFAS 138") "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," is effective for all
fiscal years beginning after June 15, 2000. SFAS 133 establishes accounting and
reporting standards requiring that all derivatives be recorded in the balance
sheet as either an asset or liability measured at
16
HEALTH NET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
10. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
fair value and that changes in fair value be recognized currently in earnings,
unless specific hedge accounting criteria are met. The Company is required to
adopt SFAS 133, as amended, in the first quarter of 2001. The Company formed an
implementation team and has substantially completed an evaluation of its
financial instruments and contracts. The Company does not expect the adoption of
SFAS 133 to have a material effect on its consolidated financial position or
results of operations.
11. SUBSEQUENT EVENT
On November 3, 2000, the Company changed its name from Foundation Health
Systems, Inc. to Health Net, Inc. and changed its ticker symbol on the New York
Stock Exchange (effective November 6, 2000) from "FHS" to "HNT". The Company
accomplished the name change by merging a wholly-owned subsidiary, HNI
Shell, Inc., with and into the Company and, in connection with such merger,
amending its Fourth Amended and Restated Certificate of Incorporation to change
the Company's name to Health Net, Inc. Prior to such name change, the Company's
California HMO subsidiary changed its name from Health Net to Health Net of
California, Inc.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Health Net, Inc. (formerly named Foundation Health Systems, Inc.) (together
with its subsidiaries, the "Company") is an integrated managed care organization
which administers the delivery of managed health care services. Through its
subsidiaries, the Company offers group, individual, Medicaid and Medicare health
maintenance organization ("HMO") and preferred provider organization ("PPO")
plans; government sponsored managed care plans; and managed care products
related to administration and cost containment, behavioral health, dental,
vision and pharmaceutical products and other services.
The Company currently operates within two segments of the managed health
care industry: Health Plan Services and Government Contracts/Specialty Services.
During 1999, the Health Plan Services segment consisted of four regional
divisions: Arizona (Arizona and Utah), California (encompassing only the State
of California), Central (Colorado, Florida, Idaho, Louisiana, New Mexico,
Oklahoma, Oregon, Texas and Washington) and Northeast (Connecticut, New Jersey,
New York, Ohio, Pennsylvania and West Virginia). During 1999, the Company either
divested its health plans or entered into arrangements to transition the
membership of its health plans in the states of Colorado, Idaho, Louisiana, New
Mexico, Oklahoma, Texas, Utah and Washington. Effective January 1, 2000, as a
result of such divestitures, the Company consolidated and reorganized its Health
Plan Services segment into two regional divisions, the Eastern Division
(consisting of Connecticut, Florida, New Jersey, New York, Ohio, Pennsylvania
and West Virginia) and the Western Division (consisting of Arizona, California
and Oregon). The Company currently intends to divest its health plan in the
state of Florida. The Company is one of the largest managed health care
companies in the United States, with approximately 3.8 million at-risk and
administrative services only ("ASO") members in its Health Plan Services
segment. The Company also owns health and life insurance companies licensed to
sell insurance in 33 states and the District of Columbia.
The Government Contracts/Specialty Services segment administers large,
multi-year managed health care government contracts. Certain components of these
contracts, including administrative and assumption of health care risk, are
subcontracted to affiliated and unrelated third parties. The Company administers
health care programs covering approximately 1.5 million eligible individuals
under TRICARE (formerly known as the Civilian Health and Medical Program of the
Uniformed Services). The Company has three TRICARE contracts that cover Alaska,
Arkansas, California, Hawaii, Oklahoma, Oregon, Texas, Washington and parts of
Arizona, Idaho and Louisiana. Through this segment, the Company offers
behavioral health, dental and vision services as well as managed care products
related to bill review, administration and cost containment for hospitals,
health plans and other entities.
This discussion and analysis and other portions of this Form 10-Q contains
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933,
as amended, that involve risks and uncertainties. All statements other than
statements of historical information provided herein may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects" and similar expressions are
intended to identify forward-looking statements. Factors that could cause actual
results to differ materially from those reflected in the forward-looking
statements include, but are not limited to, the risks discussed in the "Risk
Factors" and "Cautionary Statements" sections included in the Company's most
recent Annual Report on Form 10-K filed with the SEC and the risks discussed in
the Company's other filings with the SEC. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management's
analysis, judgment, belief or expectation only as of the date hereof. The
Company undertakes no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date hereof.
18
CONSOLIDATED OPERATING RESULTS
The Company's net income for the third quarter ended September 30, 2000 was
$44.6 million, or $0.36 per basic and diluted share, compared to net income for
the same period in 1999 of $35.1 million, or $0.29 per basic and diluted share.
The Company's net income for the nine months ended September 30, 2000 was
$117.4 million, or $0.96 per basic and diluted share, compared to net income for
the same period in 1999 of $105.0 million, or $0.86 per basic and diluted share
including a $64.7 million gain on sale of businesses and buildings as described
below.
During the third quarter ended September 30, 2000, the Company recorded a
gain of $1.1 million on the sale of property in California. For the third
quarter and nine months ended September 30, 1999, the Company recorded a net
gain of $7.5 million and $64.7 million, respectively, on the sale of its HMO
operations in the states of New Mexico, Texas, Louisiana and Oklahoma, its
preferred provider organization network subsidiary, its two California hospitals
and certain of its pharmacy benefit management assets. The Company also recorded
a $4.5 million modification to the initial 1998 estimate of an obligation
associated with the disposal of a building which was included in the asset
impairment charges. Also included in the results from operations for the nine
months ended September 30, 1999 are pretax charges for restructuring and other
costs of $16.6 million and a cumulative effect of a change in accounting
principle, net of tax, of $5.4 million.
The following provides selected financial and operating information related
to the Company's performance for the third quarter and nine months ended
September 30, 2000 and 1999, respectively. Certain 1999 amounts have been
reclassified to conform to the 2000 presentation. These reclassifications did
not affect net income or earnings per share.
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT
PER MEMBER PER MONTH DATA)
REVENUES:
Health plan premiums...................................... $1,847,400 $1,761,510 $5,430,967 $5,277,588
Government contracts/Specialty services................... 414,279 372,778 1,211,813 1,105,882
Investment and other income............................... 26,136 22,632 73,970 60,783
---------- ---------- ---------- ----------
Total revenues.......................................... 2,287,815 2,156,920 6,716,750 6,444,253
---------- ---------- ---------- ----------
EXPENSES:
Health plan services...................................... 1,575,723 1,495,784 4,628,738 4,472,846
Government contracts/Specialty services................... 283,306 244,326 810,663 725,220
Selling, general and administrative....................... 310,576 321,608 944,558 962,969
Depreciation.............................................. 16,423 17,574 50,375 52,350
Amortization.............................................. 9,675 10,505 28,979 32,033
Interest.................................................. 22,736 20,737 66,003 63,332
Restructuring and other costs............................. -- (4,500) -- 16,559
Net gain on sale of businesses and properties............. (1,068) (7,455) (1,068) (64,725)
---------- ---------- ---------- ----------
Total expenses.......................................... 2,217,371 2,098,579 6,528,248 6,260,584
---------- ---------- ---------- ----------
Income from operations before income tax provision and
cumulative effect of a change in accounting principle..... 70,444 58,341 188,502 183,669
Income tax provision........................................ 25,797 23,252 71,105 73,273
---------- ---------- ---------- ----------
Income before cumulative effect of a change in accounting
principle................................................. 44,647 35,089 117,397 110,396
Cumulative effect of a change in accounting principle....... -- -- -- (5,417)
---------- ---------- ---------- ----------
Net income.................................................. $ 44,647 $ 35,089 $ 117,397 $ 104,979
========== ========== ========== ==========
Health plan medical care ratio ("MCR")...................... 85.3% 84.9% 85.2% 84.8%
Government contracts/Specialty services MCR................. 68.4% 65.5% 66.9% 65.6%
Overall MCR................................................. 82.2% 81.5% 81.9% 81.4%
Administrative (SG&A + Depreciation) Ratio.................. 14.5% 15.9% 15.0% 15.9%
Health plan premiums per member per month................... $ 158.55 $ 139.58 $ 155.35 $ 138.08
Health plan services per member per month................... $ 135.23 $ 118.53 $ 132.40 $ 117.03
19
ENROLLMENT INFORMATION
SEPTEMBER 30
(# OF ENROLLEES IN
THOUSANDS)
PERCENT
2000 1999 CHANGE
-------- -------- --------
Health Plan Services:
Commercial............................................ 2,913 3,045 (4.3)%
Medicare Risk......................................... 264 267 (1.1)%
Medicaid.............................................. 635 676 (6.1)%
----- ----- -----
3,812 3,988 (4.4)%
===== ===== =====
Government Contracts:
TRICARE PPO and Indemnity............................. 567 661 (14.2)%
TRICARE HMO........................................... 896 840 6.7%
----- ----- -----
1,463 1,501 (2.5)%
===== ===== =====
REVENUES AND HEALTH CARE COSTS
The Company's total revenues increased by $130.9 million or 6.1% for the
third quarter ended September 30, 2000 and $272.5 million or 4.2% for the nine
months ended September 30, 2000 as compared to the same periods in 1999. Health
Plan premiums increased by $85.9 million or 4.9% for the third quarter ended
September 30, 2000 and $153.4 million or 2.9% for the nine months ended
September 30, 2000 as compared to same periods in 1999. This growth is primarily
due to the Company instituting more rigorous pricing discipline resulting in a
12.5% increase in Health Plan premiums revenue on a per member per month basis
for the nine months ended September 30, 2000, partially offset by a 4.4%
decrease in period-end enrollment in the Company's health plans as of
September 30, 2000 as compared to the same period in 1999. The 176,000 decrease
in Health Plan membership at September 30, 2000 as compared to September 30,
1999 reflects the reduction of 240,000 members enrolled in health plans sold by
the Company. This reduction in membership is partially offset by an increase of
64,000 members, primarily from continued growth in the California
point-of-service small group market and the Company's Eastern Division.
Commercial same-store premium rates increased 11.1% and 9.8% for the third
quarter and nine months ended September 30, 2000, respectively, as compared to
the same periods in 1999. Commercial same-store period-end enrollment increased
by 64,000 members as of September 30, 2000 as compared to the same period-end in
1999. Medicare enrollment declined 1.1% at September 30, 2000 as compared to
September 30, 1999 due to the Company's planned exit from certain counties.
Medicaid enrollment declined by 6.1% at September 30, 2000 as compared to
September 30, 1999 primarily due to health plan divestitures.
Health Plan Services costs increased by $79.9 million or 5.3% for the third
quarter ended September 30, 2000 and $155.9 million or 3.5% for the nine months
ended September 30, 2000 as compared to the same periods in 1999. The Health
Plan Services medical care ratio ("MCR") for the third quarter ended
September 30, 2000 increased to 85.3% from 84.9% and for the nine months ended
September 30, 2000 increased to 85.2% from 84.8% as compared to the same periods
in 1999, respectively. The respective increases in the MCR are primarily due to
pharmacy costs increasing approximately 10% for the third quarter and nine
months ended September 30, 2000, coupled with increases in hospital and
physician costs for the third quarter and nine months ended September 30, 2000
and the sale of two hospitals during the third quarter of 1999. The two
hospitals accounted for approximately $9.3 million and $36.3 million in health
plan revenues in the third quarter and nine months ended September 30, 1999 with
no associated health care costs. Eliminating the effect of the
20
hospital revenues from health plan revenues for the third quarter ended
September 30, 1999 would have resulted in the health plan MCR declining by 8
basis points.
Government Contracts/Specialty Services revenue increased by $41.5 million
or 11.1% during the third quarter ended September 30, 2000 and $105.9 million or
9.6% during the nine months ended September 30, 2000 as compared to the same
periods in 1999. The increase in the Government Contracts/Specialty Services
segment revenues was primarily due to the continuing shift in health care
utilization from military facilities to civilian facilities for the three
contracts the company holds with the Department of Defense's TRICARE programs
for dependents of active duty military personnel and retirees.
The Government Contracts/Special Services MCR increased to 68.4% from 65.5%
for the third quarter ended September 30, 2000 and to 66.9% from 65.6% for the
nine months ended September 30, 2000 as compared to the same periods in 1999.
The increase in the MCR is primarily due to the movement of health care services
from military treatment facilities to civilian facilities during 1999 which had
a continued effect and resulted in higher costs than originally specified in the
contract for the third quarter and nine months ended September 30, 2000.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
The Company's selling, general and administrative ("SG&A") expenses
decreased $11.0 million or 3.4% for the third quarter ended September 30, 2000
and $18.4 million or 1.9% for the nine months ended September 30, 2000 as
compared to the same periods in 1999. The administrative ratio
(SG&A + Depreciation as a percentage of health plan and Government/Specialty
revenues) declined by approximately 140 and 90 basis points in the third quarter
and nine months ended September 30, 2000, respectively, as compared to the same
periods in 1999. This decrease is primarily attributable to the Company's
divestiture of non-core operations during 1999 and the consolidation of certain
of its health plan operations.
AMORTIZATION AND DEPRECIATION
Amortization and depreciation expense decreased by $2.0 million or 7.1% for
the third quarter ended September 30, 2000 and $5.0 million or 6.0% for the nine
months ended September 30, 2000, as compared to the same periods in 1999. These
changes reflect decreases of $12.0 million and $17.5 million in goodwill and
fixed assets, respectively, as a result of divestitures of and impairments
associated with certain operations.
INTEREST EXPENSE
Interest expense increased by $2.0 million or 9.6% for the third quarter
ended September 30, 2000 and $2.7 million or 4.2% for the nine months ended
September 30, 2000 as compared to the same periods in 1999. The increase in
interest expense reflects the higher average borrowing rate of 7.8% and 7.5%
during the third quarter and nine months ended September 30, 2000, respectively,
as compared to 6.3% in both of the same periods in 1999, respectively. This
increase in the average borrowing rate was partially offset by a reduction in
the average revolving credit facility balance.
INCOME TAX PROVISION
The effective tax rate was 36.6% for the third quarter and 37.7% for the
nine months ended September 30, 2000, compared to the effective tax rate on
operations of 39.9% for the same periods in 1999. The effective tax rate for the
full year 1999 was 39.4%. The decrease in the effective tax rate reflects the
Company's current business mix after divestiture of non-core operations and was
also due to income earned in lower state taxing jurisdictions.
21
The effective tax rate of 36.6% for the third quarter and 37.7% for the nine
months ended September 30, 2000 differed from the statutory federal tax rate of
35.0% due primarily to state income taxes, goodwill amortization, offset by
tax-exempt investment income.
RESTRUCTURING AND OTHER COSTS
This section should be read in conjunction with Note 2, and the tables
contained therein, to the condensed consolidated financial statements.
1999 CHARGES
The Company initiated during the fourth quarter of 1998 a formal plan to
dispose of certain health plans of the Company's then Central Division included
in the Company's Health Plan Services segment in accordance with its anticipated
divestitures program. In this connection, the Company announced its plan to
close the Colorado regional processing center, terminate employees associated
with the support center and transfer these operations to the Company's other
administrative facilities. In addition, the Company announced its plans to
consolidate certain administrative functions in its Oregon and Washington health
plan operations. During the first quarter ended March 31, 1999, the Company
recorded pretax charges for restructuring and other charges of $21.1 million
which included $18.5 million for severance and benefit related costs related to
executives and operations employees at the Colorado regional processing center
and at the Oregon and Washington health plans, and $2.6 million for the
termination of real estate obligations and other costs to close the Colorado
regional processing center. As of September 30, 2000, $1.0 million of such
charges is expected to require future outlays of cash in 2000. As the closing of
the Colorado regional processing center (which is substantially completed as of
September 30, 2000) was related to the disposition of certain health plans of
the Company's former Central Division, management does not expect the closure to
have a significant impact on future results of operations or cash flows. During
the fourth quarter of 1999, the Company recorded asset impairment costs totaling
$6.2 million in connection with pending dispositions of non-core businesses.
These charges included a further adjustment of $4.7 million to adjust the
carrying value of the Company's Ohio, West Virginia and Western Pennsylvania
health plans to fair value for which the Company previously recorded an
impairment charge in 1998. The Company also adjusted the carrying value of its
subacute care management operations by $1.5 million to fair value. The revenue
and pretax income attributable to these operations were $46.6 million and
$0.1 million, respectively, for the nine months ended September 30, 2000. The
carrying value of these assets as of September 30, 2000 was $16.5 million.
1998 CHARGES
In connection with the Company's 1998 restructuring plans, severance, asset
impairment and other costs totaling $240.1 million were recorded during the year
ended December 31, 1998. As of December 31, 1999, the 1998 restructuring plans
were completed.
On July 19, 1998, FPA Medical Management, Inc. ("FPA") filed for bankruptcy
protection under Chapter 11 of the Bankruptcy Code. The FPA bankruptcy and
related events and circumstances caused management to re-evaluate the decision
to continue to operate 14 facilities previously leased to FPA and management
determined to sell the properties. As part of the 1998 Charges, the Company
recorded $84.1 million of asset impairment costs related to the 14 properties
and other costs related to FPA. The carrying value of the assets held for
disposal totaled $9.9 million at September 30, 2000. As of September 30, 2000,
12 of these properties have been sold which has resulted in net gains of
$5.0 million during 1999 and $3.6 million in 1998 which were included in net
gains on sale of businesses and buildings. The remaining properties are expected
to be sold during 2001.
22
During the fourth quarter of 1998, the Company initiated a formal plan to
dispose of certain health plans of the Company's then Central Division included
in the Company's Health Plan Services segment in accordance with its anticipated
divestitures program. The Company sold most of these health plans during 1999.
Revenues and pre-tax losses attributable to the remaining plans identified for
disposition were $7.6 million and $0.5 million, respectively, for the nine
months ended September 30, 2000. The carrying value of these assets as of
September 30, 2000 was $8.8 million. No subsequent adjustments were made to
these assets in 2000. As discussed under "1999 Charges," further adjustments of
$4.7 million to adjust the carrying value of the Company's Ohio, West Virginia
and Western Pennsylvania health plans were recorded in 1999. During the third
quarter ended September 30, 1999, a $4.5 million modification to the initial
estimate of an obligation associated with the disposal of a building which was
included in asset impairment charges was recorded.
IMPACT OF INFLATION AND OTHER ELEMENTS
The managed health care industry is labor intensive and its profit margin is
low; hence, it is especially sensitive to inflation. Increases in medical
expenses or contracted medical rates without corresponding increases in premiums
could have a material adverse effect on the Company.
Various federal and state legislative initiatives regarding the health care
industry continue to be proposed during legislative sessions. If further health
care reform or similar legislation is enacted, such legislation could impact the
Company. Management cannot at this time predict whether any such initiative will
be enacted and, if enacted, the impact on the financial condition or results of
operations of the Company.
The Company's ability to expand its business is dependent, in part, on
competitive premium pricing and its ability to secure cost-effective contracts
with providers. Achieving these objectives is becoming increasingly difficult
due to the competitive environment. In addition, the Company'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, regulatory changes, increased cost of medical services,
utilization, new technologies and drugs, hospital costs, major epidemics and
numerous other external influences may affect the Company's operating results.
Accordingly, past financial performance is not necessarily a reliable indicator
of future performance, and investors should not use historical records to
anticipate results or future period trends.
The Company's HMO and insurance subsidiaries are required to maintain
reserves to cover their estimated ultimate liability for expenses with respect
to reported and unreported claims incurred. These reserves are estimates of
future payments based on various assumptions. Establishment of appropriate
reserves is an inherently uncertain process, and there can be no certainty that
currently established reserves will prove adequate in light of subsequent actual
experience, which in the past has resulted, and in the future could result, in
loss reserves being too high or too low. The accuracy of these estimates may be
affected by external forces such as changes in the rate of inflation, the
regulatory environment, medical costs and other factors. Future loss development
or governmental regulators could require reserves for prior periods to be
increased, which would adversely impact earnings in future periods. In light of
present facts and current legal interpretations, management believes that
adequate provisions have been made for claims and loss reserves.
The Company's HMO subsidiaries contract with providers in California, and to
a lesser degree in other areas, primarily through capitation fee arrangements.
Under a capitation fee arrangement, the Company's subsidiary pays the provider a
fixed amount per member on a regular basis and the provider accepts the risk of
the frequency and cost of member utilization of services. The inability of
providers to properly manage costs under capitation arrangements can result in
financial instability of such providers. Any financial instability of capitated
providers could lead to claims for unpaid health care against the Company's HMO
subsidiaries, even though such subsidiaries have made their regular
23
payments to the capitated providers. Depending on state law, the Company's HMO
subsidiaries may or may not be liable for such claims. In California, the issue
of whether HMOs are liable for unpaid provider claims has not been definitively
settled. The California regulator of HMOs has issued a written statement to the
effect that HMOs are not liable for such claims, however currently there is
ongoing litigation on the subject.
LIQUIDITY AND CAPITAL RESOURCES
Certain of the Company's subsidiaries must comply with minimum capital and
surplus requirements under applicable state laws and regulations, and must have
adequate reserves for claims. Certain subsidiaries must maintain ratios of
current assets to current liabilities pursuant to certain government contracts.
The Company believes it is in compliance with these contractual and regulatory
requirements in all material respects.
The Company believes that cash from operations, existing working capital,
lines of credit, and funds from planned divestitures of business are adequate to
fund existing obligations, introduce new products and services, and continue to
develop health care-related businesses. The Company regularly evaluates cash
requirements for current operations and commitments, and for capital
acquisitions and other strategic transactions. The Company may elect to raise
additional funds for these purposes, either through additional debt or equity,
the sale of investment securities or otherwise, as appropriate.
Government health care receivables are best estimates of payments that are
ultimately collectible or payable. Since these amounts are subject to government
audit, negotiation and appropriations, amounts ultimately collected may vary
significantly from current estimates. Additionally, the timely collection of
such receivables is also impacted by government audit and negotiation and could
extend for periods beyond a year.
For the nine months ended September 30, 2000, cash used in operating
activities was $26.9 million compared to $35.7 million in the same period of
1999. This change was primarily due to increased operating income net of gains
on the sales of businesses and buildings and decreases in the net pay-down of
the accounts payable and other liabilities, offset by increases in the amounts
receivable under government contracts. Net cash used in investing activities was
$14.9 million during the nine months ended September 30, 2000 as compared to net
cash provided by investing activities of $115.7 million during the same period
in 1999. This decrease was primarily due to a decrease in the proceeds from the
sale of businesses and buildings offset by an increase in the net sales of
investments. Net cash used in financing activities was $92.5 million during the
nine months ended September 30, 2000 as compared to $167.9 million during the
same period in 1999. The change was primarily due to a reduction in the
repayment of funds drawn under the Company's Credit Facility (as defined below).
The Company has a $1.5 billion credit facility (the "Credit Facility"), with
Bank of America as Administrative Agent for the Lenders thereto, which was
amended by a Letter Agreement dated as of March 27, 1998 and Amendments in
April, July, and November 1998, March 1999 and in September 2000 with the
Lenders (the "Amendments"). All previous revolving credit facilities were
terminated and rolled into the Credit Facility on July 8, 1997. At the election
of the Company, and subject to customary covenants, loans are initiated on a bid
or committed basis and carry interest at offshore or domestic rates, at the
applicable LIBOR rate plus margin or the bank reference rate. Actual rates on
borrowings under the Credit Facility vary, based on competitive bids and the
Company's unsecured credit rating at the time of the borrowing. As of
September 30, 2000, the Company was in compliance with the financial covenants
of the Credit Facility, as amended by the Amendments. As of September 30, 2000,
the maximum commitment level under the Credit Agreement was approximately
$1.36 billion, of which approximately $415 million remained available. The
Credit Facility expires in July 2002, but it may be extended under certain
circumstances for two additional years.
24
The Company's subsidiaries must comply with certain minimum capital
requirements under applicable state laws and regulations. The Company will,
however, make contributions to its subsidiaries, as necessary, to meet
risk-based capital requirements under state laws and regulations. The Company
contributed $8 million to certain of its subsidiaries to meet capital
requirements during the third quarter ended September 30, 2000. In
October 2000, the Company contributed $5.6 million to certain of its
subsidiaries. As of September 30, 2000, the Company's subsidiaries were in
compliance with minimum capital requirements. Effective January 1, 2001, subject
to adoption of the codification of statutory accounting principles by the
various states, the amount of capital contributions required to meet risk-based
capital and other minimum capital requirements at the Company's various
regulated subsidiaries may change. The Company is currently in the process of
evaluating the effect of such codification on its regulated subsidiaries capital
and surplus positions.
Legislation has been or may be enacted in certain states in which the
Company's subsidiaries operate imposing substantially increased minimum capital
and/or statutory deposit requirements for HMOs in such states. Such statutory
deposits may only be drawn upon under limited circumstances relating to the
protection of policyholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate and market risk primarily due to its
investing and borrowing activities. Market risk generally represents the risk of
loss that may result from the potential change in the value of a financial
instrument as a result of fluctuations in interest rates and in equity prices.
Interest rate risk is a consequence of maintaining fixed income investments. The
Company is exposed to interest rate risks arising from changes in the level or
volatility of interest rates, prepayment speeds and/or the shape and slope of
the yield curve. In addition, the Company is exposed to the risk of loss related
to changes in credit spreads. Credit spread risk arises from the potential that
changes in an issuer's credit rating or credit perception may affect the value
of financial instruments.
The Company has several bond portfolios to fund reserves. The Company
attempts to manage the interest rate risks related to its investment portfolios
by actively managing the asset/liability duration of its investment portfolios.
The overall goal of the investment portfolios is to provide a source of
liquidity and support the ongoing operations of the Company's business units.
The Company's philosophy is to actively manage assets to maximize total return
over a multiple-year time horizon, subject to appropriate levels of risk. Each
business unit will have additional requirements with respect to liquidity,
current income and contribution to surplus. The Company manages these risks by
setting risk tolerances, targeting asset-class allocations, diversifying among
assets and asset characteristics, and using performance measurement and
reporting.
The Company uses a value-at-risk ("VAR") model, which follows a
variance/covariance methodology, to assess the market risk for its investment
portfolio. VAR is a method of assessing investment risk that uses standard
statistical techniques to measure the worst expected loss in the portfolio over
an assumed portfolio disposition period under normal market conditions. The
determination is made at a given statistical confidence level.
The Company assumed a portfolio disposition period of 30 days with a
confidence level of 95 percent for the 2000 computation of VAR. The computation
further assumes that the distribution of returns is normal. Based on such
methodology and assumptions, the computed VAR was approximately $2.2 million as
of September 30, 2000.
The Company's calculated value-at-risk exposure represents an estimate of
reasonably possible net losses that could be recognized on its investment
portfolios assuming hypothetical movements in future market rates and are not
necessarily indicative of actual results which may occur. It does not represent
the maximum possible loss nor any expected loss that may occur, since actual
future gains and losses will differ from those estimated, based upon actual
fluctuations in market rates, operating exposures,
25
and the timing thereof, and changes in the Company's investment portfolios
during the year. The Company, however, believes that any loss incurred would be
offset by the effects of interest rate movements on the respective liabilities,
since these liabilities are affected by many of the same factors that affect
asset performance; that is, economic activity, inflation and interest rates, as
well as regional and industry factors.
In addition, the Company has some interest rate market risk due to its
borrowings. Notes payable, capital leases and other financing arrangements
totaled $946.9 million at September 30, 2000 and the related average interest
rate was 7.5% (which interest rate is subject to change pursuant to the terms of
the Credit Facility) for the nine months ended September 30, 2000. See a
description of the Credit Facility under "Liquidity and Capital Resources." The
table below presents the expected future cash outflows of market risk sensitive
instruments at September 30, 2000. These cash outflows include both expected
future principal and interest payments consistent with the terms of the
outstanding debt as of September 30, 2000 (amounts in thousands).
2000 2001 2002 2003 2004 BEYOND TOTAL
-------- -------- -------- --------- --------- --------- ----------
Long-term floating rate
borrowings:
Interest.................. $ 21,387 $ 81,943 $ 39,330 -- -- -- $ 142,660
Principal................. -- -- 946,445 -- -- -- 946,445
-------- -------- -------- --------- --------- --------- ----------
Total Cash Outflows....... $ 21,387 $ 81,943 $985,775 -- -- -- $1,089,105
======== ======== ======== ========= ========= ========= ==========
26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SUPERIOR NATIONAL INSURANCE GROUP, INC.
The Company and its wholly-owned subsidiary, Foundation Health Corporation
("FHC"), have been named in an adversary proceeding, Superior National Insurance
Group, Inc. v. Foundation Health Corporation, Foundation Health Systems, Inc.
and Milliman & Robertson, Inc. ("M&R"), filed on April 28, 2000, in the United
States Bankruptcy Court for the Central District of California, case number
SV00-14099GM. The lawsuit relates to the 1998 sale of Business Insurance
Group, Inc., a holding company of workers' compensation companies operating
primarily in California ("BIG"), by FHC to Superior National Insurance
Group, Inc. ("Superior").
On March 3, 2000, the California Department of Insurance seized BIG and
Superior's other California insurance subsidiaries. On April 26, 2000, Superior
filed for bankruptcy. Two days later, Superior filed its lawsuit against the
Company, FHC and M&R.
Superior alleges that the BIG transaction was a fraudulent transfer under
federal and California bankruptcy laws in that Superior did not receive
reasonably equivalent value for the $285 million in consideration paid for BIG;
that the Company, FHC and M&R defrauded Superior by making misstatements as to
the adequacy of BIG's reserves; that Superior is entitled to rescind its
purchase of BIG; that Superior is entitled to indemnification for losses it
allegedly incurred in connection with the BIG transaction; that FHC breached the
Stock Purchase Agreement; and that FHC and the Company were guilty of California
securities laws violations in connection with the sale of BIG. Superior seeks
$300 million in compensatory damages, unspecified punitive damages and the costs
of the action, including attorneys' fees.
On August 1, 2000, a motion filed by the Company and FHC to remove the
lawsuit from the jurisdiction of the Bankruptcy Court to the United States
District Court for the Central District of California was granted, and the
lawsuit is now pending in the District Court under case number SACV00-0658 GLT.
The parties are currently engaged in discovery.
The Company believes that Superior's claims have no merit and intends to
defend itself vigorously in this litigation.
FPA MEDICAL MANAGEMENT, INC.
Since May 1998, several complaints (the "FPA Complaints") have been filed in
federal and state courts seeking an unspecified amount of damages on behalf of
an alleged class of persons who purchased shares of common stock, convertible
subordinated debentures and options to purchase common stock of FPA Medical
Management, Inc. ("FPA") at various times between February 3, 1997 and May 15,
1998. The FPA Complaints name as defendants FPA, certain of FPA's auditors, the
Company and certain of the Company's former officers. The FPA Complaints allege
that the Company and such former officers violated federal and state securities
laws by misrepresenting and failing to disclose certain information about a 1996
transaction between the Company and FPA, about FPA's business and about the
Company's 1997 sale of FPA common stock held by the Company. All claims against
the Company's former officers were voluntarily dismissed from the consolidated
class actions in both federal and state court. The Company has filed a motion to
dismiss all claims asserted against it in the consolidated federal class actions
but has not formally responded to the other complaints. Management believes
these suits against the Company are without merit and intends to vigorously
defend the actions.
27
BAJA INC. V. LOS ANGELES MEDICAL MANAGEMENT CORP., EAST LOS ANGELES DOCTORS
HOSPITAL FOUNDATION, INC.
In September 1983, a lawsuit was filed in Los Angeles Superior Court by
Baja Inc. ("Baja") against East Los Angeles Doctors Hospital Foundation, Inc.
("Hospital") and Century Medicorp ("Century") arising out of a multi-phase
written contract for operation of a pharmacy at the Hospital during the period
September 1978 through September 1983. In October 1992, Foundation Health
Corporation, now a subsidiary of the Company, acquired the Hospital and Century,
and thereafter continued the vigorous defense of this action. In August 1993,
the Court awarded Baja $549,532 on a portion of its claim. In December 1994, the
Court concluded that Baja also could seek certain additional damages subject to
proof. On July 5, 1995, the Court awarded Baja an additional $1,015,173 (plus
interest) in lost profits damages. In October 1995, both of the parties
appealed. The Court of Appeal reversed portions of the judgment, directing the
trial court to conduct additional hearings on Baja's damages. In January 2000,
after further proceedings on the issue of Baja's lost profits, the Court awarded
Baja $4,996,019 in addition to the previous amounts, plus prejudgment interest.
In June 2000, the Company filed an appeal of the Court's final judgment. The
parties have engaged in preliminary settlement discussions.
STATE OF CONNECTICUT V. PHYSICIANS HEALTH SERVICES, INC.
Physicians Health Services, Inc. ("PHS"), a subsidiary of the Company, was
sued on December 14, 1999 in the United States District Court in Connecticut by
the Attorney General of Connecticut acting on behalf of a group of state
residents. The lawsuit was premised on the federal Employee Retirement Income
Security Act ("ERISA"), and alleged that PHS violated its duties under that Act
by managing its prescription drug formulary in a manner that served its own
financial interest rather than those of plan beneficiaries. The suit sought to
have PHS revamp its formulary system, and to provide patients with written
denial notices and instructions on how to appeal. PHS filed a motion to dismiss
which asserted that the state residents the Attorney General purported to
represent all received a prescription drug appropriate for their conditions and
therefore suffered no injuries whatsoever, that his office lacked standing to
bring the suit and that the allegations failed to state a claim under ERISA. On
July 12, 2000, the court granted PHS' motion and dismissed the action. The State
of Connecticut has filed an appeal.
OTHER CLASS ACTIONS
On November 22, 1999, a complaint was filed in the United States District
Court for the Southern District of Mississippi in a lawsuit entitled Pay v.
Foundation Health Systems, Inc. (2:99CV329). The two count complaint seeks
certification of a nationwide class action and alleges that cost containment
measures used by the Company's health maintenance organizations, preferred
provider organizations and point-of-service health plans violate provisions of
the federal Racketeer Influenced and Corrupt Organizations Act ("RICO") and
ERISA. The action seeks unspecified damages and injunctive relief. The case was
stayed on January 25, 2000, pending the resolution of various procedural issues
involving similar actions filed against Humana, Inc. in the Southern District of
Florida. On June 23, 2000, the plaintiffs filed an amended complaint in the
Humana action to add claims against other managed care organizations, including
the Company. On October 23, 2000, the court allowed the plaintiffs to amend the
complaint alleging claims against the Company to add two new named plaintiffs
and withdraw the originally named plaintiff from the action. Consequently, this
case will now be entitled ROMERO V. FOUNDATION HEALTH SYSTEMS, INC. Management
believes the suit against the Company is without merit and intends to vigorously
defend the action.
On August 17, 2000, a complaint was filed in the United States District
Court for the Southern District of Florida in a lawsuit entitled Shane v.
Humana, Inc., et al. (including Foundation Health Systems, Inc.) (00-1334-MD).
The complaint seeks certification of a nationwide class action on behalf
28
of physicians and alleges that the defendant managed care companies' methods of
reimbursing physicians violate provisions of ERISA, RICO and various state laws.
The action seeks unspecified damages and injunctive relief. Management believes
the suit against the Company is without merit and intends to vigorously defend
the action.
On September 7, 2000, the Attorney General of Connecticut filed a lawsuit
against Physicians Health Services of Connecticut, Inc. This suit names
Foundation Health Systems, Inc., Anthem Blue Cross and Blue Shield of CT, Anthem
Health Plans, Inc., CIGNA Healthcare of CT, Inc., Oxford Health Plans of
CT, Inc. as defendants, and asserts claims against PHS and the Company that are
similar, if not identical, to those asserted in the previous lawsuit that was
dismissed on July 12, 2000. Management believes the suit against the Company is
without merit and intends to vigorously defend the action.
On September 7, 2000, a complaint was filed in the United States District
Court for the District of Connecticut in a lawsuit entitled Albert v. CIGNA
Healthcare of Connecticut, Inc., et al. (including Physicians Health Services of
Connecticut, Inc. and Foundation Health Systems, Inc.) (300CV1717-CJS). The
complaint seeks certification of a nationwide class action and alleges that the
defendant managed care companies' various practices violate provisions of ERISA.
The action seeks unspecified damages and injunctive relief. Management believes
the suit against the Company is without merit and intends to vigorously defend
the action.
In May 2000, the California Medical Association filed a lawsuit, purportedly
on behalf of its member physicians, in the United States District Court for the
Northern District of California against several managed care organizations,
including the Company, entitled California Medical Association v. Blue Cross of
California, Inc., PacifiCare Health Systems, Inc., PacifiCare Operations, Inc.
and Foundation Health Systems, Inc. The plaintiff alleges that the manner in
which the defendants contract and interact with its member physicians violates
provisions of RICO. The action seeks declaratory and injunctive relief, as well
as costs and attorneys fees. The Company filed a motion to dismiss the action on
various grounds. In August 2000, plaintiffs in other actions pending against
different managed care organizations petitioned the Judicial Panel on
Multi-District Litigation to consolidate the California action with the other
actions in the United States District Court for the Northern District of
Alabama. In light of the pending petition, the California court stayed the
action and the hearing on the Company's motion to dismiss the complaint pending
a determination of the petition to consolidate.
On October 23, 2000, the Judicial Panel on Multi-District Litigation ruled
that the foregoing class actions should be consolidated, for purposes of
pre-trial proceedings only, with other cases pending against managed care
organizations in the United States District Court for the Southern District of
Florida in Miami. It is anticipated that orders formally transferring the above
cases for pre-trial purposes to the United States District Court for the
Southern District of Florida in Miami will issue soon. Management believes the
foregoing class actions against the Company are without merit and intends to
vigorously defend the actions.
MISCELLANEOUS PROCEEDINGS
The Company and certain of its subsidiaries are also parties to various
other legal proceedings, many of which involve claims for coverage encountered
in the ordinary course of its business. Based in part on advice from litigation
counsel to the Company and upon information presently available, management of
the Company is of the opinion that the final outcome of all such proceedings
should not have a material adverse effect upon the Company's results of
operations or financial condition.
29
ITEM 2. CHANGES IN SECURITIES
REVOLVING CREDIT FACILITY
The Company has an unsecured, five-year $1.5 billion revolving credit
facility pursuant to a Credit Agreement dated July 8, 1997 (the "Credit
Agreement") with the banks identified in the Credit Agreement (the "Banks") and
Bank of America, N.A. National Trust and Savings Association ("Bank of America")
as Administrative Agent. All previous revolving credit facilities were
terminated and rolled into the Credit Agreement. The Credit Agreement contains
customary representations and warranties, affirmative and negative covenants,
and events of default. Specifically, Section 7.11 of the Credit Agreement
provides that the Company and its subsidiaries may, so long as no event of
default exists: (i) declare and distribute stock as a dividend; (ii) purchase,
redeem or acquire its stock, options and warrants with the proceeds of
concurrent public offerings; and (iii) declare and pay dividends or purchase,
redeem or otherwise acquire its capital stock, warrants, options or similar
rights with cash subject to certain specified limitations.
Under the Credit Agreement, as amended pursuant to a Letter Agreement dated
as of March 27, 1998, the First Amendment and Waiver to Credit Agreement dated
as of April 6, 1998, the Second Amendment to Credit Agreement dated as of
July 31, 1998, the Third Amendment to Credit Agreement dated as of November 6,
1998, the Fourth Amendment to Credit Agreement dated as of March 26, 1999 and
the Fifth Amendment to Credit Agreement dated as of September 20, 2000
(collectively, the "Amendments") with the Banks, the Company is: (i) obligated
to maintain certain covenants keyed to the Company's financial condition and
performance (including a Total Leverage Ratio and Fixed Charge Ratio);
(ii) obligated to limit liens; (iii) subject to customary covenants, including
(A) disposition of assets only in the ordinary course and generally at fair
value and (B) restrictions on acquisitions, mergers, consolidations, loans,
leases, joint ventures, contingent obligations and certain transactions with
affiliates; and (iv) permitted to incur additional indebtedness in an aggregate
amount not to exceed $1,000,000,000 upon certain terms and conditions. The
Credit Agreement also provides for mandatory prepayment of the outstanding loans
under the Credit Agreement with a certain portion of the proceeds from the
issuance of such indebtedness and from the sales of assets, resulting in a
permanent reduction of the aggregate amount of commitments under the Credit
Agreement by the amount so prepaid. As of September 30, 2000, the maximum
commitment level permitted under the Credit Agreement was approximately
$1.36 billion, of which approximately $415 million remained available. The
Amendments also have provided for an increase in the interest and facility fees
under the Credit Agreement. The Company is able to obtain letters of credit
under the Credit Agreement up to an aggregate amount of $100 million.
SHAREHOLDER RIGHTS PLAN
On May 20, 1996, the Board of Directors of the Company declared a dividend
distribution of one right (a "Right") for each outstanding share of the
Company's Class A Common Stock and Class B Common Stock (collectively, the
"Common Stock"), to stockholders of record at the close of business on July 31,
1996 (the "Record Date"). The Board of Directors of the Company also authorized
the issuance of one Right for each share of Common Stock issued after the Record
Date and prior to the earliest of the Distribution Date (as defined below), the
redemption of the Rights and the expiration of the Rights, and in certain other
circumstances. Rights will attach to all Common Stock certificates representing
shares then outstanding and no separate Rights certificates will be distributed.
Subject to certain exceptions contained in the Rights Agreement dated as of
June 1, 1996 by and between the Company and Harris Trust and Savings Bank, as
Rights Agent (the "Rights Agreement"), the Rights will separate from the Common
Stock in the event any person acquires 15% or more of the outstanding Class A
Common Stock, the Board of Directors of the Company declares a holder of 10% or
more of the outstanding Class A Common Stock to be an "Adverse Person," or any
person
30
commences a tender offer for 15% or more of the Class A Common Stock (each event
causing a "Distribution Date").
Except as set forth below and subject to adjustment as provided in the
Rights Agreement, each Right entitles its registered holder, upon the occurrence
of a Distribution Date, to purchase from the Company one one-thousandth of a
share of Series A Junior Participating Preferred Stock at a price of $170.00 per
one-thousandth share. However, in the event any person acquires or commences a
tender offer for 15% or more of the outstanding Class A Common Stock, or the
Board of Directors of the Company declares a holder of 10% or more of the
outstanding Class A Common Stock to be an "Adverse Person," the Rights (subject
to certain exceptions contained in the Rights Agreement) will instead become
exercisable for Class A Common Stock having a market value at such time equal to
$340.00. The Rights are redeemable under certain circumstances at $.01 per Right
and will expire, unless earlier redeemed, on July 31, 2006.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as Exhibit 99.1 to the Company's Registration Statement on
Form 8-A (File No. 001-12718). In connection with its execution of the Merger
Agreement for the merger transaction involving Foundation Health Corporation and
Health Systems International, Inc., the Company's predecessors, the Company
entered into Amendment No. 1 (the "Rights Amendment") to the Rights Agreement to
exempt the Merger Agreement and related transactions from triggering the Rights.
In addition, the Rights Amendment modifies certain terms of the Rights Agreement
applicable to the determination of certain "Adverse Persons," which
modifications became effective upon consummation of the transactions provided
for under the Merger Agreement. This summary description of the Rights does not
purport to be complete and is qualified in its entirely by reference to the
Rights Agreement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security holders,
either through solicitation of proxies or otherwise, during the quarter ended
September 30, 2000.
ITEM 5. OTHER INFORMATION
RECENT DEVELOPMENTS
NAME CHANGE. On November 3, 2000, the Company changed its name from
Foundation Health Systems, Inc. to Health Net, Inc. and changed its ticker
symbol on the New York Stock Exchange (effective November 6, 2000) from "FHS" to
"HNT". The Company accomplished the name change by merging a wholly-owned
subsidiary, HNI Shell, Inc., with and into the Company and, in connection with
such merger, amending its Fourth Amended and Restated Certificate of
Incorporation to change the Company's name to Health Net, Inc. Prior to such
name change, the Company's California HMO subsidiary changed its name from
Health Net to Health Net of California, Inc. ("HN California").
OHIO, WEST VIRGINIA AND WESTERN PENNSYLVANIA OPERATIONS. The Company has
decided to exit the Ohio, West Virginia and Western Pennsylvania markets in
which it operates (the "OK/WV/WPA Markets"). In this connection, the Company has
provided notice of intention to withdraw from these service areas to the
appropriate regulators. The Company's withdrawal from the OK/WV/WPA Markets will
be effected at various times in late 2000 through early 2001. Following
completion of these withdrawal efforts, the Company will have no future
operations in such markets and intends to dissolve its subsidiaries operating in
such markets and recover any remaining capital.
31
MEDPARTNERS PROVIDER NETWORK, INC. On March 11, 1999, MedPartners Provider
Network, Inc. ("MPN"), a Knox-Keene licensed entity and a subsidiary of
MedPartners, Inc., a publicly-held physician practice and pharmacy benefit
management company (now known as Caremark Rx, Inc.) was placed into
conservatorship by the State of California under Section 1393(c) of the
California Health and Safety Code. The conservator immediately filed a petition
under Chapter 11 of the Bankruptcy Code on behalf of MPN. As of that date, HN
California had approximately 215,000 enrollees associated with MPN and its
affiliated provider groups and clinics.
MPN, with financial support from Caremark Rx, Inc., proposed a Chapter 11
Plan of Reorganization which required a significant minimum level of
participation by hospitals, physicians and other providers, and under which
substantial monies would be paid against hospital, physician and other provider
claims, if the hospitals, physicians and other providers executed and delivered
releases in favor of MPN and others, including the health plans. The minimum
required levels of participation by hospitals, physicians and other providers
were reached during the quarter ended September 30, 2000. As a result, MPN's
Chapter 11 Plan of Reorganization was confirmed by the Bankruptcy Court on
September 14, 2000, subject to certain conditions. On October 16, 2000, MPN's
Chapter 11 Plan of Reorganization became fully effective. In related proposals,
Caremark Rx, Inc. proposed, and has implemented, similar payment and release
provisions for physician and other claimants against the clinic affiliates of
Caremark Rx, Inc. and MPN.
California law is not fully settled on the ultimate liability of health
plans for unpaid provider claims where the health plan has already paid a
capitation payment to the bankrupt provider group that is intended to cover such
claims. However, as a result of MPN's Chapter 11 Plan of Reorganization and
related agreements, a substantial majority of the provider claims that were
unpaid as of the date of MPN's bankruptcy filing have been resolved and/or
released and, accordingly, the possible liability of the Company's California
HMO subsidiary for such claims has been similarly resolved and/or released.
KPC ORGANIZATION. In August 1999, MPN sold the majority of its California
clinic operations to KPC Medical Management, Inc. (together with its affiliates,
"the KPC Organization"). HN California had approximately 66,000 members whose
health care was provided by these operations as of September 30, 2000. The KPC
Organization has significantly restructured the operations it purchased from
MPN. Various health plans and other parties have made loans and other financial
accomodations to the KPC Organization. Notwithstanding such financial
accomodations, the KPC Organization continues to incur losses and its financial
viability remains unclear. HN California continues to monitor the KPC
Organization and its financial viability.
OTHER POTENTIAL DIVESTITURES
CERTAIN OTHER OPERATIONS. The Company continues to evaluate the
profitability realized or likely to be realized by its existing businesses and
operations, and is reviewing from a strategic standpoint which of such
businesses or operations should be divested. In this connection, the Company
intends to divest its Florida operations and, with respect thereto, is currently
considering various expressions of interest it has received from third parties.
NEW VENTURES GROUP
The Company believes that the Internet and related new technologies will
fundamentally change managed care organizations. Accordingly, the Company has
created a New Ventures Group to focus on the strategic direction of the Company
in light of the Internet and related technologies and to pursue opportunities
consistent with such direction. Currently, the Company is developing
collaborative approaches with business partners to transform their existing
assets and expertise into new e-business opportunities. The Company believes
that net-enabled connectivity among purchasers, consumers, managed care
organizations, providers and other trading partners is a prerequisite to
creating and
32
capturing e-business opportunities. The Company is currently developing business
concepts to take advantage of those market opportunities that provide value to
consumers, purchasers of benefits and the providers of medical and health care
services.
In this connection, the Company, through its subsidiary Questium, Inc.
("Questium"), launched the website www.questium.com which is a health care
consumer website that links health plan members directly with their personal
health benefit information. The Questium website allows health plan members to
customize their own web page and gain access to information and services such as
customized health news and updates, and individual health coverage information,
such as co-payment levels and out-of-pocket maximums. In the first half of 2001,
Questium believes that health plan members will be able use the Questium website
to refill mail order prescriptions online and view individual medical histories
from health plan records. As of the date hereof, the Questium website offers,
among other things, access to general consumer information, such as a health
encyclopedia, alternative care and clinical trial information, and online health
evaluation tools, such as a health risk calculator and weight-loss guide.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed as part of this Quarterly Report on Form
10-Q or are incorporated herein by reference:
2.1 Agreement and Plan of Merger, dated October 1, 1996, by and
among Health Systems International, Inc., FH Acquisition
Corp. and Foundation Health Corporation (filed as
Exhibit 2.5 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, which is
incorporated herein by reference).
2.2 Agreement and Plan of Merger, dated May 8, 1997, by and
among the Company, PHS Acquisition Corp. and Physicians
Health Services, Inc. (filed as Exhibit 2.2 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997, which is incorporated herein by
reference).
2.3 Amendment No. 1 to Agreement and Plan of Merger, dated
October 20, 1997, by and among the Company, PHS
Acquisition Corp. and Physicians Health Services, Inc.
(filed as Exhibit 2.3 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997, which
is incorporated herein by reference).
3.1 Fourth Amended and Restated Certificate of Incorporation of
the Registrant (filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-8 (File No. 333-24621),
which is incorporated herein by reference).
*3.2 Certificate of Ownership and Merger amending the Fourth
Amended and Restated Certificate of Incorporation, a copy
of which is filed herewith.
3.3 Fifth Amended and Restated Bylaws of the Registrant (filed
as Exhibit 3.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, which is
incorporated herein by reference).
3.4 Certain Amendments to the Fifth Amended and Restated Bylaws
of the Registrant (filed as Exhibit 3.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, which is incorporated herein by
reference).
4.1 Form of Class A Common Stock Certificate (included as
Exhibit 4.2 to the Company's Registration Statements on
Forms S-1 and S-4 (File nos. 33-72892 and 33-72892-01,
respectively), which is incorporated herein by reference).
33
4.2 Form of Class B Common Stock Certificate (included as
Exhibit 4.3 to the Company's Registration Statements on
Forms S-1 and S-4 File nos. 33-72892 and 33-72892-01,
respectively), which is incorporated herein by reference).
4.3 Rights Agreement dated as of June 1, 1996 by and between the
Company and Harris Trust and Savings Bank, as Rights Agent
(filed as Exhibit 99.1 to the Company's Registration
Statement on Form 8-A (File No. 001-12718), which is
incorporated herein by reference).
4.4 First Amendment to the Rights Agreement dated as of
October 1, 1996, by and between the Company and Harris
Trust and Savings Bank, as Rights Agent (filed as
Exhibit 10.40 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, which is
incorporated herein by reference).
10.1 Employment Letter Agreement between the Company and
Karin D. Mayhew dated January 22, 1999 (filed as
Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999, which is
incorporated herein by reference).
10.2 Letter Agreement between B. Curtis Westen and the Company
dated June 25, 1998 (filed as Exhibit 10.73 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, which is incorporated herein by
reference).
10.3 Employment Letter Agreement dated July 3, 1996 between
Jay M. Gellert and the Company (filed as Exhibit 10.37 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, which is incorporated
herein by reference).
10.4 Amended Letter Agreement between the Company and Jay M.
Gellert dated as of August 22, 1997 (filed as
Exhibit 10.69 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, which is
incorporated herein by reference).
10.5 Letter Agreement between the Company and Jay M. Gellert
dated as of March 2, 2000 (filed as Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000, which is incorporated herein by
reference).
10.6 Employment Letter Agreement between the Company and
Jeffrey J. Bairstow dated as of January 29, 1998 (filed as
Exhibit 10.5 to the Company's Quarterly Report on
Form 10Q for the quarter ended March 31, 2000, which is
incorporated herein by reference).
10.7 Employment Letter Agreement between the Company and
Steven P. Erwin dated March 11, 1998 (filed as
Exhibit 10.72 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, which is
incorporated herein by reference).
10.8 Employment Agreement between the Company and Maurice Costa
dated December 31, 1997 (filed as Exhibit 10.71 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997, which is incorporated herein by
reference).
10.9 Employment Letter Agreement between the Company and Gary S.
Velasquez dated May 1, 1996 (filed as Exhibit 10.13 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, which is incorporated herein by
reference).
10.10 Employment Letter Agreement between the Company and Cora
Tellez dated November 16, 1998 (filed as Exhibit 10.16 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, which is incorporated herein by
reference).
10.11 Employment Letter Agreement between the Company and Karen
Coughlin dated March 12, 1999 (filed as Exhibit 10.17 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, which is incorporated herein by
reference).
34
10.12 Form of Severance Payment Agreement dated December 4, 1998
by and between the Company and various of its executive
officers filed as Exhibit 10.21 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998,
which is incorporated herein by reference).
10.13 Severance Payment Agreement between the Company and Maurice
Costa dated April 6, 1998 (filed as Exhibit 10.24 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998, which is incorporated herein by
reference).
10.14 The Company's Deferred Compensation Plan effective as of
May 1, 1998 (filed as Exhibit 10.66 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1998, which is incorporated herein by
reference).
10.15 The Company's Deferred Compensation Plan Trust Agreement
dated as of September 1, 1998 between the Company and
Union Bank of California (filed as Exhibit 10.31 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998, which is incorporated herein by
reference).
*10.16 The Company's Second Amended and Restated 1991 Stock Option
Plan, as amended, a copy of which is filed herewith.
10.17 The Company's 1997 Stock Option Plan (filed as
Exhibit 10.45 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, which is
incorporated herein by reference).
10.18 The Company's Amended and Restated 1998 Stock Option Plan
(filed as Exhibit 10.18 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000, which is
incorporated herein by reference).
10.19 The Company's 1995 Stock Appreciation Right Plan (filed as
Exhibit 10.12 to the Company's Quarterly Report on
Form 10-Q for the Quarter ended September 30, 1995, which
is incorporated herein by reference).
10.20 The Company's Second Amended and Restated Non-Employee
Director Stock Option Plan filed as Exhibit 10.31 to
Registration Statement on Form S-4 (File No. 33-86524),
which is incorporated herein by reference).
10.21 The Company's Third Amended and Restated Non-Employee
Director Stock Option Plan (filed as Exhibit 10.46 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997, which is incorporated herein by
reference).
*10.22 The Company's Employee Stock Purchase Plan, as amended, a
copy of which is filed herewith.
10.23 The Company's Performance-Based Annual Bonus Plan (filed as
Exhibit 10.48 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, which is
incorporated herein by reference).
10.24 The Company's 401(k) Associate Savings Plan (filed as
Exhibit 4.5 to the Company's Registration Statement on
Form S-8 filed on March 31, 1998, which is incorporated
herein by reference).
10.25 The Company's Supplemental Executive Retirement Plan
effective as of January 1, 1996 (filed as Exhibit 10.65 to
the Company's Annual Report on Form 10- K for the year
ended December 31, 1998, which is incorporated herein by
reference).
10.26 Managed Health Network, Inc. Incentive Stock Option Plan
(filed as Exhibit 4.8 to the Company's Registration
Statement on Form S-8 (File No. 333- 24621), which is
incorporated herein by reference).
35
10.27 Managed Health Network, Inc. Amended and Restated 1991 Stock
Option Plan (filed as Exhibit 4.9 to the Company's
Registration Statement on Form S-8 (File No. 333-24621),
which is incorporated herein by reference).
10.28 Foundation Health Corporation 1990 Stock Option Plan (filed
as Exhibit 4.5 to the Company's Registration Statement on
Form S-8(File No. 333-24621), which is incorporated herein
by reference).
10.29 FHC Directors Retirement Plan (filed as an exhibit to FHC's
Annual Report on Form 10-K for the year ended June 30,
1994 filed with the Commission on September 24, 1994,
which is incorporated herein by reference).
10.30 FHC's Deferred Compensation Plan, as amended and restated
(filed as Exhibit 10.99 to FHC's Annual Report on
Form 10-K for the year ended June 30, 1995, filed with the
Commission on September 27, 1995, which is incorporated
herein by reference).
10.31 FHC's Supplemental Executive Retirement Plan, as amended and
restated (filed as Exhibit 10.100 to FHC's Annual Report
on Form 10-K for the year ended June 30, 1995, filed with
the Commission on September 27, 1995, which is
incorporated herein by reference).
10.32 FHC's Executive Retiree Medical Plan, as amended and
restated (filed as Exhibit 10.101 to FHC's Annual Report
on Form 10-K for the year ended June 30, 1995, filed with
the Commission on September 27, 1995, which is
incorporated herein by reference).
10.33 Stock and Note Purchase Agreement by and between FHC,
Jonathan H., Scheff, M.D., FPA Medical Management, Inc.,
FPAMedical Management of California, Inc. and FPA
Independent Practice Association dated as of June 28, 1996
(filed as Exhibit 10.109) to FHC's Annual Report on
Form 10-K for the year ended June 30, 1996, which is
incorporated herein by reference).
10.34 Credit Agreement dated July 8, 1997 among the Company, the
banks identified therein and Bank of America National
Trust and Savings Association in its capacity as
Administrative Agent (providing for an unsecured
$1.5 billion revolving credit facility) (filed as
Exhibit 10.23 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, which is
incorporated herein by reference).
10.35 Guarantee Agreement dated July 8, 1997 between the Company
and First Security Bank, National Association (filed as
Exhibit 10.24 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997, which
is incorporated herein by reference).
10.36 First Amendment and Waiver to Credit Agreement dated
April 6, 1998 among the Company, Bank of America National
Trust and Savings Association and the Banks (as defined
therein) (filed as Exhibit 10.64 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998, which is incorporated herein by
reference).
10.37 Second Amendment to Credit Agreement dated July 31, 1998
among the Company, Bank of America National Trust and
Savings Association and the Banks (as defined therein)
(filed as Exhibit 10.65 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998, which is
incorporated herein by reference).
10.38 Third Amendment to Credit Agreement, dated November 6, 1998,
among the Company, Bank of America National Trust and
Savings Association and the Banks (as defined therein)
(filed as Exhibit 10.65 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998,
which is incorporated herein by reference).
36
10.39 Fourth Amendment to Credit Agreement, dated as of March 26,
1999, among the Company, Bank of America National Trust
and Savings Association and the Banks, as defined therein
(filed as Exhibit 10.64 to the Company's Form 10-K for the
year ended December 31, 1998, which is incorporated herein
by reference).
10.40 Form of Credit Facility Commitment Letter, dated March 27,
1998, between the Company and the Majority Banks (as
defined therein) filed as Exhibit 10.70 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1997, which is incorporated herein by
reference).
10.41 Office Lease, dated as of January 1, 1992, by and between
Warner Properties III and Health Net (filed as
Exhibit 10.23 to the Company's Registration Statements on
Forms S-1 and S-4 (File Nos. 33-72892 and 33-72892-01,
respectively), which is incorporated herein by reference).
10.42 Lease Agreement between HAS-First Associates and FHC dated
August 1, 1988 and form of amendment thereto (filed as an
exhibit to FHC's Registration Statement on Form S-1 (File
No. 33-34963), which is incorporated herein by reference).
10.43 Asset Purchase Agreement dated December 31, 1998 by and
between the Company and Access Health, Inc. (filed as
Exhibit 10.62 to the Company's Form 10-K for the year
ended December 31, 1998, which is incorporated herein by
reference).
10.44 Purchase Agreement dated February 26, 1999 by and among the
Company, Foundation Health Pharmaceutical Services, Inc.,
Integrated Pharmaceutical Services, Inc., and Advance
Paradigm, Inc. (filed as Exhibit 10.63 to the Company's
Form 10-K for the year ended December 31, 1998, which is
incorporated herein by reference).
*10.45 Fifth Amendment to Credit Agreement, dated as of
September 20, 2000, among the Company, Bank of America
National Trust and Savings Association and the Banks, as
defined therein, a copy of which is filed herewith.
*10.46 Office Lease dated September 20, 2000 by and among Health
Net, DCA Homes, Inc. and Lennar Rolling Ridge, Inc., a
copy of which is filed herewith.
11.1 Statement relative to computation of per share earnings of
the Company (included in the Notes to the Condensed
Consolidated Financial Statements contained in this
Quarterly Report on Form 10-Q.)
*27.1 Financial Data Schedule for the third quarter ended
September 30, 2000, a copy of which has been filed with
the EDGAR version of this filing.
- ------------------------
* A copy of the exhibit is being filed with this Quarterly Report on
Form 10-Q.
(b) REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed by the Company during the
quarterly period ended September 30, 2000.
37
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
HEALTH NET, INC.
(REGISTRANT)
Date: November 8, 2000 By: /s/ JAY M. GELLERT
-----------------------------------------
Jay M. Gellert
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: November 8, 2000 By: /s/ STEVEN P. ERWIN
-----------------------------------------
Steven P. Erwin
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
38