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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from ____________ to ____________
Commission File Number: 1-12718
FOUNDATION HEALTH SYSTEMS, 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)
21600 Oxnard Street, Woodland Hills, CA 91367
---------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(818) 719-6978
----------------------------------------------------
(Registrant's telephone number, including area code)
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:
As of August 12, 1997 109,808,213 shares of Class A Common Stock, $.001 par
value per share, were outstanding (exclusive of 3,194,374 shares held as
treasury stock) and 11,449,342 shares of Class B Common Stock, $.001 par value
per share were outstanding.
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FOUNDATION HEALTH SYSTEMS, INC.
INDEX TO FORM 10-Q
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets - June 30, 1997
and December 31, 1996 3
Condensed Consolidated Statements of Operations for the Quarters
Ended June 30, 1997 and 1996 4
Condensed Consolidated Statements of Operations for the Six
Months Ended June 30, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 25
Item 2 - Changes in Securities 27
Item 3 - Defaults Upon Senior Securities 29
Item 4 - Submission of Matters to a Vote of Security Holders 29
Item 5 - Other Information 29
Item 6 - Exhibits and Reports on Form 8-K 37
Signature 48
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOUNDATION HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, December 31,
1997 1996
----------- ------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 483,650 $ 514,000
Investments 1,118,748 1,336,801
Premiums receivable, net 249,346 239,027
Amounts receivable under government contracts 243,257 221,787
Property and equipment, net 360,141 346,311
Reinsurance receivable 201,565 149,582
Goodwill and other intangible assets, net 717,491 714,915
Other assets 654,362 561,618
----------- ------------
$ 4,028,560 $ 4,084,041
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Reserves for claims, losses and loss adjustment expense $ 1,350,029 $ 1,362,342
Notes payable and capital leases 1,009,988 877,092
Amounts payable under government contracts 46,929 44,323
Accounts payable and other liabilities 682,177 616,873
----------- ------------
3,089,123 2,900,630
----------- ------------
Stockholders' Equity:
Common stock and additional paid-in capital 741,085 721,610
Retained earnings 416,125 557,478
Unrealized holding gains and losses, net of taxes (7,561) 3,201
Common stock held in treasury, at cost (210,212) (98,878)
----------- ------------
939,437 1,183,411
----------- ------------
$ 4,028,560 $ 4,084,041
----------- ------------
----------- ------------
See Notes to Condensed Consolidated Financial Statements
3
FOUNDATION HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(Unaudited)
Quarter Ended June 30,
---------------------------
1997 1996
----------- -----------
Revenues:
Health plan premiums $1,408,317 $ 1,349,722
Government contracts 223,620 252,830
Workers' compensation revenue 134,476 151,484
Specialty services revenue 62,063 68,770
Investment and other income 41,249 32,805
----------- -----------
1,869,725 1,855,611
----------- -----------
Expenses:
Health plan services 1,183,993 1,119,757
Government health care services 166,488 200,877
Workers' compensation costs 131,219 130,183
Specialty services costs 56,102 63,519
Selling, general and administrative 190,869 213,434
Amortization and depreciation 25,716 28,622
Interest expense 17,254 9,904
Merger, restructuring and other costs 348,400 -
Gem reinsurance costs 57,500 -
----------- -----------
2,177,541 1,766,296
----------- -----------
Income (loss) from continuing operations before income taxes (307,816) 89,315
Income tax provision (benefit) (107,692) 29,127
----------- -----------
Income (loss) from continuing operations (200,124) 60,188
Gain from discontinued operations, net of tax - 6,300
----------- -----------
Net income (loss) $ (200,124) $ 66,488
----------- -----------
----------- -----------
Earnings (loss) per share:
Continuing operations ($1.59) $0.48
Discontinued operations - 0.05
----------- -----------
Net ($1.59) $0.53
----------- -----------
----------- -----------
Weighted average common and common
stock equivalent shares outstanding 125,783,672 125,381,721
----------- -----------
----------- -----------
See Notes to Condensed Consolidated Financial Statements
4
FOUNDATION HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(Unaudited)
Six Months Ended June 30,
---------------------------
1997 1996
----------- -----------
Revenues:
Health plan premiums $ 2,828,413 $ 2,660,904
Government contracts 469,654 400,177
Workers' compensation revenue 265,140 289,315
Specialty services revenue 125,886 124,780
Investment and other income 75,775 56,418
----------- -----------
3,764,868 3,531,594
----------- -----------
Expenses:
Health plan services 2,366,273 2,196,024
Government health care services 357,400 303,939
Workers' compensation costs 253,746 251,632
Specialty services costs 109,703 112,263
Selling, general and administrative 404,132 401,443
Amortization and depreciation 51,316 55,348
Interest expense 32,259 19,213
Merger, restructuring and other costs 348,400 -
Gem reinsurance costs 57,500 -
----------- -----------
3,980,729 3,339,862
----------- -----------
Income (loss) from continuing operations before income taxes (215,861) 191,732
Income tax provision (benefit) (74,214) 65,877
----------- -----------
Income (loss) from continuing operations (141,647) 125,855
Gain from discontinued operations, net of tax - 2,910
----------- -----------
Net income (loss) $ (141,647) $ 128,765
----------- -----------
----------- -----------
Earnings (loss) per share:
Continuing operations ($1.13) $1.01
Discontinued operations - 0.02
----------- -----------
Net ($1.13) $1.03
----------- -----------
----------- -----------
Weighted average common and common
stock equivalent shares outstanding 125,740,759 124,736,140
----------- -----------
----------- -----------
See Notes to Condensed Consolidated Financial Statements
5
FOUNDATION HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30,
----------------------------
1997 1996
--------- ---------
Net cash provided (used) by operations $(298,574) $ 22,100
--------- ---------
INVESTING ACTIVITIES:
Sale or redemption of marketable securities held for sale 503,845 354,454
Purchases of marketable securities held for sale (298,613) (457,309)
Decrease (increase) in other assets 64,774 (45,009)
Purchases of property and equipment (44,228) (48,567)
Acquisition of subsidiaries, net of cash acquired 7,613 107
--------- ---------
Net cash provided (used) by investing activities 233,391 (196,324)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases 12,861 23,724
Proceeds from sale of stock - 96,230
Borrowings on credit facilities 264,979 116,189
Purchase of treasury stock (111,334) (105,417)
Repayment of debt and other non-current liabilities (131,673) (3,308)
--------- ---------
Net cash provided by financing activities 34,833 127,418
--------- ---------
Decrease in cash and cash equivalents (30,350) (46,806)
Cash and cash equivalents, beginning of period 514,000 376,749
--------- ---------
Cash and cash equivalents, end of period $ 483,650 $ 329,943
--------- ---------
--------- ---------
See Notes to Condensed Consolidated Financial Statements
6
FOUNDATION HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - MERGER
Effective April 1, 1997, Foundation Health Systems, Inc. (the "Company") was
formed pursuant to a merger transaction (the "Merger") involving Health
Systems International, Inc. ("HSI") and Foundation Health Corporation
("FHC"). Pursuant to the Merger, FHC merged into a newly created subsidiary
of HSI and each outstanding share of FHC capital stock was converted into 1.3
shares of HSI's Class A Common Stock. As part of the transaction HSI
remained as the ultimate parent company and changed its name to "Foundation
Health Systems, Inc." The Merger was tax-free and accounted for as a pooling
of interests. In accordance with the pooling of interests method of
accounting the Company's consolidated financial statements as of December 31,
1996 and for the six months ended June 30, 1997 and 1996 and the three months
ended June 30, 1996 and the notes thereto have been restated to include the
accounts of HSI and FHC for all periods presented. Although prior to the
merger HSI reported on a calendar year basis and FHC's final Annual Report
was reported on a fiscal year ended June 30 basis, the condensed consolidated
financial statements have been restated to reflect the Company's calendar
year basis.
NOTE 2 - BASIS OF PRESENTATION
In the opinion of management, the accompanying condensed consolidated financial
statements include all adjustments necessary for a fair presentation of the
consolidated financial position of the Company and the consolidated results of
its operations and its cash flows for the interim periods presented. Although
the Company believes that the disclosures in these financial statements are
adequate to make the information presented not misleading, certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). For further information please refer to the
consolidated financial statements and notes thereto in the HSI Annual Report on
Form 10-K for the year ended December 31, 1996 and the FHC Annual Report on Form
10-K/A Amendment No. 3 for the year ended June 30, 1996. Results of operations
for the interim periods are not necessarily indicative of results to be expected
for the full year.
NOTE 3 - MERGER, RESTRUCTURING AND OTHER COSTS
The Company recorded a charge for merger, restructuring and other costs of
$348.4 million in the quarter ended June 30, 1997. The components of this
charge include merger related costs, restructuring costs and other costs.
7
MERGER RELATED COSTS
Merger costs totaling $74.0 million were incurred in the quarter ended June
30, 1997 and include $28.8 million of transaction costs, primarily consisting
of investment banking, legal, accounting, filing and printing fees.
Integration costs totaled $25.5 million and directors and officers liability
coverage required by the merger agreement totaled $3.1 million. Costs to
consolidate the debt facilities of the combining companies totaled $9.6
million. All other merger related costs totaled $7.0 million.
RESTRUCTURING COSTS
In connection with the Merger, the Company adopted a restructuring plan during
the quarter ended June 30, 1997, the principal elements of which include: a
workforce reduction of approximately 1,050 employees; the consolidation of
employee benefit plans; the consolidation of facilities in geographic locations
where office space is duplicated; the consolidation of overlapping provider
networks; and the consolidation of information systems at all locations to
standardized systems. The plan, which the Company anticipates will be
substantially completed by the end of the second quarter of 1998, resulted in a
restructuring charge of $188.1 million for the quarter ended June 30, 1997.
The following table summarizes the principal components of the charge in
millions:
Severance and benefit related costs $68.1
Provider network consolidation costs 43.2
Real estate lease termination costs 32.6
Asset impairment costs 44.2
------
$188.1
------
------
$143.9 million of this charge is expected to require outlays of cash. As of
June 30, 1997, $36.7 million of the total accrued restructuring charge had
been paid.
Severance and benefit related costs include a termination benefits plan and
contractually required change of control payments to certain senior
executives. Also included are the costs of settlements of benefit plans being
terminated as a result of the restructuring plan to conform benefits for the
combining companies.
Provider network consolidation costs include costs to consolidate overlapping
provider networks, primarily in California, and the costs of exiting existing
provider contracts as legally, regulatorily or administratively required.
Real estate lease termination costs include facilities consolidation costs
primarily in geographic regions where there is overlapping office space usage.
8
Asset impairment costs are primarily a result of the Company's plan to be on
common operating systems and hardware platforms. These costs include impairment
of hardware, software and other systems related assets.
OTHER COSTS
Other costs totaling $86.3 million included non-recurring charges for the
quarter ended June 30, 1997. The primary components of these charges
included $30.5 million for IPA receivables related to provider contracts that
will not be renewed as a result of the Merger; $17.2 million for government
receivables related to prior contracts and adjustments on current contracts
being negotiated with the Department of Defense; $13.4 million for litigation
settlement estimates on claims primarily related to former FHC subsidiaries;
$12.6 million for the loss on disposal of the Company's United Kingdom
operations; and $5.2 million related to losses on certain subscriber
contracts.
NOTE 4 - GEM REINSURANCE COSTS
Gem Insurance Company ("Gem"), a subsidiary of the Company, has reached
definitive agreements regarding a Quota Share Reinsurance Agreement and an
Administration, Management and Transfer Agreement as of April 1, 1997 with
The Centennial Life Insurance Company and Centennial Management Services,
Inc. (collectively "Centennial"). Pursuant to these agreements, Centennial
will reinsure, administer and manage Gem's accident and health, life and
annuity policies in exchange for a reinsurance premium. The cost of the
reinsurance along with the write-off of certain Gem assets that are not
recoverable based on the terms of these agreements totaled $57.5 million.
NOTE 5 - INVESTMENTS
Investments are comprised of the following (in thousands):
June 30, 1997 December 31, 1996
------------- ------------------
Available for sale $ 1,089,186 $ 1,306,606
Held to maturity 29,562 30,195
------------- ------------------
Total investments $ 1,118,748 $ 1,336,801
------------- ------------------
------------- ------------------
For purposes of calculating realized gains and losses on sales of investments
available for sale, the amortized cost of each investment sold is used.
9
NOTE 6 - BUSINESS SEGMENT INFORMATION
The Company operates principally in the following two segments: (i) providing
managed health care services to subscribers and (ii) the writing of workers'
compensation insurance. The following schedule sets forth information about
these two operating segments.
10
FOUNDATION HEALTH SYSTEMS, INC.
SEGMENT REPORTING
(In millions)
QUARTER ENDED SIX MONTHS ENDED
------------------------ -------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
---------- --------- ---------- -----------
Net revenue from unaffiliated entities:
Managed health care (1) $ 1,722.5 $ 1,694.5 $ 3,474.7 $ 3,223.1
Managed workers' compensation 147.2 161.1 290.2 308.5
---------- --------- ---------- -----------
$ 1,869.7 $ 1,855.6 $ 3,764.9 $ 3,531.6
---------- --------- ---------- -----------
---------- --------- ---------- -----------
Income (loss) from continuing operations
before income taxes:
Managed health care (1) $ (297.2) $ 73.6 $ (208.7) $ 163.6
Managed workers' compensation 6.7 25.6 25.0 47.3
Interest expense (17.3) (9.9) (32.2) (19.2)
---------- --------- ---------- -----------
$ (307.8) $ 89.3 $ (215.9) $ 191.7
---------- --------- ---------- -----------
---------- --------- ---------- -----------
Depreciation and amortization:
Managed health care (1) $ 24.0 $ 27.2 $ 48.0 $ 52.2
Managed workers' compensation 1.7 1.4 3.3 3.1
---------- --------- ---------- -----------
$ 25.7 $ 28.6 $ 51.3 $ 55.3
---------- --------- ---------- -----------
---------- --------- ---------- -----------
Capital expenditures:
Managed health care (1) $ 20.4 $ 20.5 $ 38.4 $ 43.9
Managed workers' compensation 3.5 2.9 5.8 4.7
---------- --------- ---------- -----------
$ 23.9 $ 23.4 $ 44.2 $ 48.6
---------- --------- ---------- -----------
---------- --------- ---------- -----------
AS OF
-------------------------
JUNE 30, DECEMBER 31,
1997 1996
---------- -----------
Total assets:
Managed health care (1) $ 2,813.6 $ 2,933.2
Managed workers' compensation 1,215.0 1,150.8
---------- -----------
$ 4,028.6 $ 4,084.0
---------- -----------
---------- -----------
(1) Includes general corporate balances net of eliminations
11
NOTE 7 - STOCKHOLDERS' EQUITY
On June 27, 1997 the Company redeemed 4,550,000 shares of its Class B Common
Stock from The California Wellness Foundation, the charitable receipient of
the proceeds from the conversion of the Company's Health Net subsidiary to
for-profit status in 1992. The redemption price was approximately $111.3
million, or $24.47 a share.
NOTE 8 - ACQUISITIONS
ADVANTAGE HEALTH
On April 1, 1997 the Company completed the acquisition of Advantage Health, a
group of managed health care companies based in Pittsburgh, PA, for $12.5
million in cash. Advantage Health has approximately 40,000 full-risk
members. In 1996 Advantage Health recorded revenues of approximately $56
million, with about 90 percent from health plan operations. The Company
purchased Advantage Health from St. Francis Health System, which has a
short-term option to re-acquire a 20 percent interest in Advantage Health for
$2.5 million. Advantage Health remains a party to long-term provider
agreements with the St. Francis Health System.
PACC
On April 9, 1997 the Company announced that it had reached a definitive
agreement to acquire PACC, a 116,000 member health plan based in Oregon for
an undisclosed amount. The transaction is subject to receipt of all
applicable regulatory approvals. The Company expects the transaction to
close in the third quarter of 1997.
FIRST OPTION HEALTH PLAN
On April 30, 1997 the Company completed a $51.7 million investment in FOHP,
Inc. ("FOHP") based in Red Bank, New Jersey. FOHP is owned by physicians,
hospitals and other health care providers and is the sole shareholder of
First Option Health Plan of New Jersey, Inc. ("FOHP-NJ"), a managed care
company. The Company's investment is in the form of FOHP debentures
convertible into up to 71 percent of FOHP's outstanding equity at the
Company's discretion. In addition to the investment, the Company will
provide a variety of management services to FOHP in return for a percentage
of FOHP's premium revenue. The Company, at its option, may also provide
information systems and claims processing services to FOHP. First Option
currently has more than 250,000 members in New Jersey enrolled in its
commercial, Medicare, Medicaid and PPO programs.
12
PHYSICIANS HEALTH SERVICES
On May 8, 1997 the Company entered into a definitive agreement to acquire
Physicians Health Services, Inc. ("PHS") for $29.25 per share, or a total
consideration of approximately $300 million. PHS is a 440,000 member health
plan with operations in the New York metropolitan area, including northern
New Jersey, and throughout the state of Connecticut. The consummation of the
transaction is subject to customary conditions, including approval by PHS
stockholders and the receipt of all necessary governmental authorizations.
In connection with entering into the definitive acquisition agreement, the
Greater Bridgeport Individual Practice Association, Inc., holding a majority
of the outstanding voting power of PHS stock, agreed to vote in favor of the
transaction. The Company will fund the acquisition with cash on hand and
existing bank credit lines. The Company presently expects that the
transaction will close in the third or fourth quarter of 1997.
CHRISTIANIA GENERAL INSURANCE CORPORATION
On May 14, 1997 the Business Insurance Group, Inc. ("BIG"), a subsidiary of
the Company, acquired the Christiania General Insurance Corporation of New
York ("CGIC"). CGIC was purchased by BIG to more effectively compete in the
workers' compensation and group accident and health markets outside of
California. CGIC is currently licensed in 47 states with 27 workers'
compensation licenses and 23 group accident and health licenses.
NOTE 9 - SUBSEQUENT EVENT
On July 8, 1997 the Company entered into a $1.5 billion revolving credit
facility with Bank of America as Administrative Agent for the lenders thereto.
All previously existing credit facilities were terminated and rolled into this
new facility. As of July 8, 1997 the amount outstanding on this line was $860
million.
NOTE 10 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February, 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, (EARNINGS PER SHARE) ("SFAS 128") which
requires changes in current earnings per share ("EPS") reporting requirements.
The Company is required to adopt SFAS 128 in the fourth quarter of 1997.
Management expects there to be no significant difference in the calculation and
reporting of EPS under the new statement, hence, SFAS 128 is not expected to
significantly affect historical or future EPS.
In June, 1997, the Financial Accounting Standards Board adopted Statements of
Financial Accounting Standards No. 130 (REPORTING COMPREHENSIVE INCOME), which
requires that an enterprise report, by major components and as a single total,
the change in its net assets during the period from nonowner sources; and No.
131 (DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION), which
establishes annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, geographic areas,
and major customers. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations or cash flows. Both
statements are effective for fiscal years beginning after December 15, 1997.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Foundation Health Systems, Inc. (the "Company") is an integrated managed care
organization which administers the delivery of managed health care services.
Through its subsidiaries, the Company offers group, Medicaid, individual and
Medicare health maintenance organization ("HMO") and preferred provider
organization ("PPO") plans; government sponsored managed care plans; and managed
care products related to workers' compensation insurance, administration and
cost-containment, behavioral health, dental, vision and pharmaceutical products
and services.
The current operations of the Company are a result of the April 1, 1997
merger transaction (the "Merger") involving Health Systems International,
Inc. ("HSI") and Foundation Health Corporation ("FHC"). Pursuant to the
Merger, FH Acquisition Corp., a wholly owned subsidiary of HSI ("Merger
Sub"), merged with and into FHC and FHC survived as a wholly owned subsidiary
of HSI, which changed its name to "Foundation Health Systems, Inc." and
thereby became the Company. Pursuant to the Agreement and Plan of Merger (the
"Merger Agreement") that evidenced the Merger, FHC stockholders received 1.3
shares of the Company's Class A Common Stock for every share of FHC common
stock held. The shares of the Company's Class A Common Stock issued to FHC's
stockholders in the Merger constituted approximately 61% of the outstanding
stock of the Company after the Merger and the shares held by the Company's
stockholders prior to the Merger (i.e., the prior stockholders of HSI)
constituted approximately 39% of the outstanding stock of the Company after
the Merger.
The Merger was accounted for as a pooling of interests for accounting and
financial reporting purposes. The pooling of interests method of accounting
is intended to present, as a single interest, two or more common stockholder
interests which were previously independent and assumes that the combining
companies have been merged from inception. Consequently, in this Quarterly
Report on Form 10-Q, the Company's condensed consolidated financial
statements have been prepared and/or restated as though HSI and FHC always
had been combined.
Commercial HMO and PPO operations are characterized by the assumption of
underwriting risk in return for premium revenue. Government contracts consist
of contractual services to state and federal government programs such as CHAMPUS
and Medicaid in which the Company receives revenues for administrative and
management services and, under most of the contracts, also accepts financial
responsibility for health care costs. Workers' compensation services consist of
operations in which the Company assumes risk in return for premium revenue and
operations in which the Company provides third party administration and bill
review services. Specialty services consists both of operations in which the
Company assumes underwriting risk in return for premium revenue, including
behavioral health, dental and vision HMO products, and
14
operations in which the Company provides administrative services only,
including certain of the behavioral health and pharmacy benefits management
programs.
CONSOLIDATED OPERATING RESULTS
The Company experienced minimal growth in overall revenues for the quarter
ended June 30, 1997 as compared to the same period in calendar year 1996.
Growth in revenues from health plan premiums was partially offset by
decreases in revenues in the government contracts, workers' compensation and
specialty services businesses. The overall medical loss ratio ("MLR") for
the quarter and six months ended June 30, 1997 as compared to the same
periods in 1996 increased due to continued pricing pressures primarily in the
workers' compensation business in California and throughout the Company's
health plans as well as an increase in pharmacy costs in the Company's health
plans and higher estimated future costs of the claims reported and not yet
settled in the Company's California workers' compensation business. Revenues
for the six months ended June 30, 1997 increased by 6.6% as compared to
revenues for the same period in 1996. Revenue increases from new government
contracts and growth in health plan premiums contributed to this increase.
The Company's selling, general and administrative ("SG&A") expenses decreased
by 10.6% for the quarter ended June 30, 1997 compared to the same quarter in
1996, and increased 0.7% for the six months ended June 30, 1997 compared to
the same period in 1996. The administrative expense ratio (SG&A as a percent
of revenue) decreased from 11.5% for the quarter ended June 30, 1996 to 10.2%
for the quarter ended June 30, 1997. The administrative expense ratio
decreased from 11.4% for the six months ended June 30, 1996 to 10.7% for the
six months ended June 30, 1997. Favorable expense reductions have occurred
for the quarter and six months ended June 30, 1997 as a percent of revenues
due to the Company's ongoing efforts to aggressively control its selling and
administrative expenses and a change in the California health plans
commission structures. In addition, the disposition of the Company's United
Kingdom operations and the reinsurance and administrative contracts with its
Gem Insurance Company subsidiary ("Gem") in the quarter ended June 30, 1997
also contributed to the favorable changes.
The difference between the statutory combined federal and state income tax
rate of 40.4% and the Company's effective tax rate of 34.9% for the quarter
and 34.4% for the six months ended June 30, 1997 on income from continuing
operations is primarily due to health plan premiums not subject to income tax
in certain states, permanent differences associated with tax exempt interest
income, research and experimental tax credits, partially offset by
non-amortizable goodwill, non-deductible merger and restructuring costs and
other non-deductible items.
Merger, restructuring and other costs caused the net loss in the quarter and six
months ended June 30, 1997. Gem reinsurance costs incurred in the quarter ended
June 30, 1997 also contributed to the net loss. Income for the quarter ended
June 30, 1997 from continuing operations before taxes, excluding the Gem
reinsurance costs and merger, restructuring and other costs, increased slightly
compared to the same period a year ago. Income for the six months ended June
30, 1997 from continuing operations before taxes, excluding the Gem reinsurance
costs and merger, restructuring and other costs, decreased slightly compared to
the same period in 1996.
In connection with the Merger, the Company adopted a significant restructuring
plan which provides for a workforce reduction of approximately 1,050 employees,
the consolidation of employee benefit plans, the consolidation of certain office
locations, the
15
consolidation of overlapping provider networks, and the consolidation of
information systems to standard systems. Management anticipates that
substantial payroll, rent and other cost savings will be obtained once the
plan is fully implemented. The restructuring charge for the quarter ended
June 30, 1997 totaled $188.1 million. The major components of this charge
include $68.1 million for severance and benefit related costs, $43.2 million
for provider network consolidation costs, $32.6 million for real estate lease
termination costs, and $44.2 million for asset impairment costs.
Merger related costs for the quarter ended June 30, 1997 totaling $74.0 million
consisted primarily of $28.8 million of transaction costs, $25.5 million of
integration costs, $3.1 million of directors and officers liability insurance
costs, and $9.6 million of debt facilities consolidation costs.
Other charges for the quarter ended June 30, 1997 consist primarily of $30.5
million for IPA receivables related to provider contracts that will not be
renewed, $17.2 for government receivables, $13.4 million for litigation
settlement estimates, $12.6 million for the loss on the disposal of the
United Kingdom operations, and $5.2 million for losses on subscriber
contracts.
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, integration of acquired companies, regulatory changes, utilization,
new technologies, 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.
Certain of 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 costs 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, the judicial administration of
claims, 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.
LINE OF BUSINESS REPORTING
The Company currently operates in two industry segments, managed health care and
managed workers' compensation. The managed health care segment's continuing
operations are in three primary lines of business (i) health plan services; (ii)
government contracts; and (iii) specialty services.
The following table presents financial information reflecting the Company's
continuing operations for both segments and its primary lines of business:
16
FOUNDATION HEALTH SYSTEMS, INC.
LINE OF BUSINESS FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Quarter Ended
Quarter Ended June 30, 1997 June 30, 1996
------------------------------------------- -------------------------
Percent Percent Percent
Amount or of Total Increase Amount or of Total
Percent Revenue (Decrease) Percent Revenue
------------ -------- --------- ----------- --------
Revenues:
Health plan premiums $ 1,408,317 75.3% 4.3% $1,349,722 72.7%
Government contracts 223,620 12.0 (11.6) 252,830 13.6
Workers' compensation revenue 134,476 7.2 (11.2) 151,484 8.2
Specialty services revenue 62,063 3.3 (9.8) 68,770 3.7
Investment and other income 41,249 2.2 25.7 32,805 1.8
------------ -------- ----------- --------
1,869,725 100.0 0.8 1,855,611 100.0
------------ -------- ----------- --------
Expenses:
Health plan services 1,183,993 63.3 5.7 1,119,757 60.3
Government health care services 166,488 8.9 (17.1) 200,877 10.8
Workers' compensation costs 131,219 7.0 0.8 130,183 7.0
Specialty services costs 56,102 3.0 (11.7) 63,519 3.4
Selling, general and administrative (SG&A) 190,869 10.2 (10.6) 213,434 11.5
Amortization and depreciation 25,716 1.4 (10.2) 28,622 1.5
Interest expense 17,254 0.9 74.2 9,904 0.5
Merger, restructuring and other costs 348,400 18.6 - - -
Gem reinsurance costs 57,500 3.1 - - -
------------ -------- ----------- --------
2,177,541 116.5 23.3 1,766,296 95.2
------------ -------- ----------- --------
Income (loss) from continuing operations (307,816) (16.5) (444.6) 89,315 4.8
before income taxes
Income tax provision (benefit) (107,692) (5.8) (469.7) 29,127 1.6
------------ -------- ----------- --------
Income (loss) from continuing operations $ (200,124) (10.7)% (432.5) $ 60,188 3.2%
------------ -------- ----------- --------
------------ -------- ----------- --------
Earnings (loss) per share from continuing operations $ (1.59) (431.4) $ 0.48
------------ -----------
------------ -----------
Weighted average common and common
stock equivalent shares outstanding 125,783,672 0.3 125,381,721
------------ -----------
------------ -----------
Operating ratios:
Health plan loss ratio 84.1% 83.0%
Government contracts ratio 74.5 79.5
Workers' compensation ratio 97.6 85.9
Specialty services ratio 90.4 92.4
SG&A to total revenues 10.2 11.5
Effective tax rate (benefit) (34.9) 32.6
17
FOUNDATION HEALTH SYSTEMS, INC.
LINE OF BUSINESS FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Six Months Ended
Six Months Ended June 30, 1997 June 30, 1996
------------------------------------------- -------------------------
Percent Percent Percent
Amount or of Total Increase Amount or of Total
Percent Revenue (Decrease) Percent Revenue
------------ -------- --------- ------------ --------
Revenues:
Health plan premiums $ 2,828,413 75.1% 6.3% $ 2,660,904 75.3%
Government contracts 469,654 12.5 17.4 400,177 11.3
Workers' compensation revenue 265,140 7.0 (8.4) 289,315 8.2
Specialty services revenue 125,886 3.3 0.9 124,780 3.5
Investment and other income 75,775 2.0 34.3 56,418 1.6
----------- ------- ----------- -------
3,764,868 100.0 6.6 3,531,594 100.0
----------- ------- ----------- -------
Expenses:
Health plan services 2,366,273 62.9 7.8 2,196,024 62.2
Government health care services 357,400 9.5 17.6 303,939 8.6
Workers' compensation costs 253,746 6.7 0.8 251,632 7.1
Specialty services costs 109,703 2.9 (2.3) 112,263 3.2
Selling, general and administrative (SG&A) 404,132 10.7 0.7 401,443 11.4
Amortization and depreciation 51,316 1.4 (7.3) 55,348 1.6
Interest expense 32,259 0.9 67.9 19,213 0.5
Merger, restructuring and other costs 348,400 9.3 - - -
Gem reinsurance costs 57,500 1.5 - - -
----------- ------- ----------- -------
3,980,729 105.7 19.2 3,339,862 94.6
----------- ------- ----------- -------
Income (loss) from continuing operations (215,861) (5.7) (212.6) 191,732 5.4
before income taxes
Income tax provision (benefit) (74,214) (2.0) (212.7) 65,877 1.9
----------- ------- ----------- -------
Income (loss) from continuing operations $ (141,647) (3.8)% (212.5) $ 125,855 3.6%
----------- ------- ----------- -------
----------- ------- ----------- -------
Earnings (loss) per share from continuing operations $ (1.13) (211.6) $ 1.01
----------- -----------
----------- -----------
Weighted average common and common
stock equivalent shares outstanding 125,740,759 0.8 124,736,140
----------- -----------
----------- -----------
Operating ratios:
Health plan loss ratio 83.7% 82.5%
Government contracts ratio 76.1 76.0
Workers' compensation ratio 95.7 87.0
Specialty services ratio 87.1 90.0
SG&A to total revenues 10.7 11.4
Effective tax rate (benefit) (34.4) 34.4
Enrollment (in thousands):
Health Plan:
Commercial 2,701 (3.0) 2,784*
Medicare risk 252 10.0 229
Medicaid 353 9.0 324
----------- -------- ---------
3,306 (0.9) 3,337
----------- -------- ---------
Government:
CHAMPUS PPO and indemnity 933 (13.0) 1,072
CHAMPUS HMO 578 26.5 457
----------- -------- ---------
1,511 (1.2) 1,529
----------- -------- ---------
Combined 4,817 (1.0)% 4,866
----------- -------- ---------
----------- -------- ---------
* Includes 197,000 from Gem Insurance Company and the U.K.
operations which are excluded in 1997.
18
MANAGED HEALTH CARE SEGMENT
HEALTH PLAN OPERATIONS
Revenues generated by the Company's health plan operations increased 4.3% in
the quarter ended June 30, 1997 compared to the quarter ended June 30, 1996
and 6.3% for the six months ended June 30, 1997 compared to the same period
in 1996 primarily due to enrollment increases in the Medicare and Medicaid
lines of business in the California market, annual increases in Medicare
premiums, and commercial enrollment increases in markets outside of
California. The Company expects continued pressure from employer groups and
government agencies to reduce premiums.
Health care costs on a per member basis increased for the quarter and six
months ended June 30, 1997 as compared to the quarter and six months ended
June 30, 1996 primarily due to higher pharmacy costs. In the California
market, health care costs increased as a result of higher pharmacy costs for
both the commercial and Medicare lines of business, percentage of premium
provider contracting arrangements, increased utilization in the Medicare line
of business, and increased enrollment in the Medicaid line of business. The
health plans loss ratio increased from 83.0% for the quarter ended June 30,
1996 to 84.1% for the quarter ended June 30, 1997 and from 82.5% for the six
months ended June 30, 1996 to 83.7% for the six months ended June 30, 1997.
Continued downward pressure on pricing, coupled with increased pharmacy costs
and utilization contributed to the overall health plan loss ratio increase.
GOVERNMENT CONTRACTS
Government contract revenues decreased 11.6% in the quarter ended June 30, 1997
as compared to the same quarter in 1996 as a result of improved health care and
subcontractor performance on the California/Hawaii and Washington/Oregon
contracts, which lowered revenues due to the risk sharing features of these
government contracts. Revenues for the six months ended June 30, 1997 increased
17.4% compared to the same period in 1996 because the California/Hawaii
contract did not commence until April, 1996.
Government health care costs as a percentage of government contract revenues
decreased from 79.5% for the quarter ended June 30, 1996 to 74.5% for the
quarter ended June 30, 1997 as a result of the improved health care and
subcontractor cost performance on the California/Hawaii and Washington/Oregon
contracts. The cost percentage for the six months ended June 30, 1997
increased only 0.1% as compared to the same period in 1996, which is a
function of the addition of the California/Hawaii contract in 1997.
19
SPECIALTY SERVICES
Specialty services operations are comprised of several companies including
behavioral health, pharmacy benefits management, dental, vision and a third
party health care administrator. Revenues generated by the Company's specialty
services operations decreased in the quarter ended June 30, 1997 compared to the
same period in 1996 primarily due to the sale of certain ancillary health care
service operations in the fourth quarter of 1996. Revenues for the six months
ended June 30, 1997 compared to the same period in 1996 increased due to the
acquisition of Managed Health Network, Inc. ("MHN") in March, 1996.
The Company expects continued pressure from employer groups to maintain
modest increases in premiums for behavioral health, dental and vision
products. Specialty services costs have decreased as a percent of specialty
services revenue from 92.4% for the quarter ended June 30, 1996 to 90.4% for
the quarter ended June 30, 1997. The decrease is due to the synergies in
operating costs created after the acquisition of MHN which was purchased in
the quarter ended March 31, 1996. Specialty services costs for the six
months ended June 30, 1997 decreased to 87.1% as a percent of revenue
compared to 90.0% for the same period in 1996. This decrease was also due to
the favorable benefits of the MHN acquisition.
MANAGED WORKERS' COMPENSATION SEGMENT
Business Insurance Group, Inc. ("BIG") is a leading national managed care
workers' compensation group and a subsidiary of the Company. BIG owns the
following seven affiliate companies: California Compensation Insurance
Company, a specialty workers' compensation carrier writing primarily in
California; Business Insurance Company, a national workers' compensation
specialty carrier; Christiania General Insurance of New York, licensed to
write multiple lines of business in approximately 47 states; Combined
Benefits Insurance Company, writing single source workers' compensation and
employee health insurance primarily in California; Reviewco, which provides
bill review, utilization management and PPO network services nationally; FIRM
Solutions, a national risk management and TPA company; and Claims Technical
Services, a wholly owned subsidiary of FIRM Solutions, specializing in
providing temporary employees to the workers' compensation and health
insurance industry (collectively referred to as the "Workers' Compensation
Companies").
The Workers' Compensation Companies entered into a quota share reinsurance
agreement ("quota share treaty") with a non-affiliated national reinsurance
company, effective July 1, 1996, and also entered into an aggregate excess of
loss treaty ("aggregate treaty") with the same reinsurer as of January 1, 1997.
20
The Workers' Compensation Companies previously utilized a quota share treaty
from January 1990 through June 1994, at ceding rates ranging from 5% to 40%.
Under the current quota share treaty, the percentage of premiums earned, losses
and loss adjustment expenses incurred ceded to the reinsurer was 30% from July
1, 1996 to December 31, 1996, and 7.5% for the period of January 1, 1997 to June
30, 1997. A ceding commission is accrued based on actual loss experience
reported for the subject period.
Under the aggregate treaty, during the six months ended June 30, 1997, $29.8
million of premium revenue and $37.2 million of losses and loss adjustment
expenses were ceded to the reinsurer.
Net premiums earned before quota share and aggregate excess of loss reinsurance
ceded increased by 7.6% for the quarter ended June 30, 1997 to $151.0 million
from $140.3 million for the quarter ended June 30, 1996. The growth in premiums
is due primarily to national expansion through the Company's multi-state
insurance workers' compensation subsidiary in states outside of California.
Premiums earned on workers' compensation policies issued in California continue
to be affected by severe price competition since the start of competitive rating
in January, 1995. Due to the premiums ceded in the quota share and the
aggregate reinsurance treaties, net premiums earned in the current quarter
declined by 11% compared to 1996.
Net investment income, excluding realized capital gains, increased by 63.6% in
the quarter ended June 30, 1997 compared to the comparable quarter last year.
The growth in investment income is due to an increase in investable assets from
operational cash flow, as well as capital contributions to the workers'
compensation companies of $75 million in May, 1996 and $55 million in August,
1996 from borrowings BIG made from its parent.
Three primary ratios are used to measure underwriting performance of the
workers' compensation companies: the loss and loss adjustment expense ratio and
the underwriting expense ratio, which when added together constitute the
combined ratio. A combined ratio of greater than 100% reflects an underwriting
loss, while a combined ratio of less than 100% indicates an underwriting profit.
These ratios are all calculated as a percentage of net premiums earned.
The following sets forth the workers' compensation companies underwriting
experience as measured by its combined ratio and its components for the quarters
ended June 30, 1997 and 1996:
The loss and loss adjustment expense ratio for the current quarter increased to
74.0% from 63.4% for the comparable quarter in 1996. The increase in the ratio
is due to an increase in the estimated ultimate cost of workers' compensation
claims that have not yet been settled as of June 30, 1997. While the frequency
of new claims reported in the quarter is consistent with 1996, and the average
loss cost of closed claims has also remained unchanged from last year, the
estimated future cost of those claims reported but not yet settled has
increased. In addition, $5.6 million of favorable prior accident year
21
loss development was recognized in the quarter ended June 30, 1996, which is
4.0% of net premiums earned for the 1996 quarter. During the quarter ended
June 30, 1997, there was no favorable prior year development for accident
years 1996 and prior.
The underwriting expense ratio increased in the current quarter to 26.4% from
25.5% for the comparable quarter in 1996. The increase is affected by the
reduction in net premiums earned due to the aggregate reinsurance treaty,
effective January 1, 1997, and the ceded commission accrued on the quota share
treaty, which is based on the loss and loss expense experience during the
quarter.
LIQUIDITY AND CAPITAL RESOURCES
Cash used by operating activities was $298.6 million for the six months ended
June 30, 1997 as compared to cash provided by operating activities of $22.1
million for the comparable period in fiscal year 1996 due to timing of the
accrual for and payment of operating payables and due to the timing of
receipt or payment of amounts under government contracts and from government
agencies. The Company's cash and investments decreased from $1,850.8 million
at December 31, 1996 to $1,602.5 million at June 30, 1997 primarily due to
the repurchase of stock from The California Wellness Foundation for $111.3
million, the Company's investment in FOHP, Inc. in April, 1997 of $51.7
million and the timing of certain government receipts for health plan
services.
Certain of the Company's subsidiaries must comply with minimum capital and
surplus requirements under applicable state HMO and insurance laws and
regulations, and must have adequate reserves for claims incurred but not yet
reported and claims payments. Certain subsidiaries must maintain ratios of
current assets to current liabilities of 1:1 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 and
lines of credit are adequate to fund existing obligations, introduce new
products and services, complete its pending acquisitions 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.
22
Management of the Company continually evaluates opportunities to expand the
Company's commercial, government, insurance and specialty services operations;
however, the Company currently has no material commitments for future use of its
current or expected levels of available cash resources except as described
above. The Company's expansion options may include additional acquisitions and
internal development of new products and programs.
As of June 30, 1997 the Company and FHC had three separate revolving credit
facilities totaling $1.2 billion. The Company's credit facility dated April 4,
1996 for $700 million with Bank of America as Administrative Agent for the
lenders thereto had $556.5 million outstanding as of June 30, 1997. FHC had two
credit facilities; the first a $300 million facility dated December 5, 1994 with
Citicorp USA, Inc. as Administrative Agent for the lenders thereto, had $300
million outstanding as of June 30, 1997. The other, a $200 million facility
dated December 17, 1996 with Citicorp USA, Inc. as Administrative Agent for the
lenders thereto, had $105 million outstanding as of June 30, 1997. The total
outstanding on the three facilities as of June 30, 1997 was $961.5 million.
On July 8, 1997 the Company entered into a $1.5 billion revolving credit
facility with Bank of America as Administrative Agent for the lenders
thereto. All previously existing credit facilities were terminated and
rolled into this new facility. As of July 8, 1997 the amount outstanding on
this line was $860 million.
On June 16, 1997 FHC, a wholly owned subsidiary of the Company, announced a
tender offer to repurchase all of its $125 million outstanding principal amount
of 7-3/4% Senior Notes due 2003. The purchase price per $1,000 principal amount
of notes was $1,054.77. As of June 30, 1997 $124 million of principal amount
had been tendered and repurchased. On July 15, 1997 the remaining $1 million of
principal amount had been tendered and repurchased.
During the quarter ended June 30, 1997, FHC sold 4,076,087 shares of common
stock of FPA Medical Management, Inc. that it had received as consideration in
its sale of the affiliated physician-owned Medical Practices and its physician
management subsidiary. The proceeds from the sale of stock was about $79
million, or an average of $19.45 per share. In addition, as of June 30, 1997
FPA Medical Management, Inc. prepaid about $98.7 million due on a promissory
note received as consideration in the Company's sale of its Medical Practices.
On June 27, 1997 the Company redeemed 4,550,000 shares of its Class B Common
Stock from The California Wellness Foundation, the charitable receipient of
the proceeds from the conversion of the Company's Health Net subsidiary to
for-profit status in 1992. The redemption price was approximately
$111.3 million, or $24.47 a share.
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 without corresponding increases in premiums could have a material
adverse effect on the Company.
23
Various federal and state legislative initiatives regarding the health care
industry have been proposed during recent legislative sessions, and health care
reform and similar issues continue to be in the forefront of social and
political discussion. If 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 operations of the Company.
Reference is also made to the disclosures contained under the headings "Risk
Factors" and "Cautionary Statements" included in the Company's various
filings with the Securities and Exchange Commission and the documents
incorporated by reference therein, which could cause the Company's actual
results to differ from those projected in forward looking statements of the
Company made on behalf of the Company. In addition, certain of these factors
may have affected the Company's past results and may affect future results.
24
PART II. OTHER INFORMATION
INTRODUCTION
As referenced in Part I above, the current operations of Foundation
Health Systems, Inc. (the "Company") are a result of the April 1, 1997 merger
transaction (the "Merger") involving Health Systems International, Inc.
("HSI") and Foundation Health Corporation ("FHC"). Pursuant to the Merger,
FH Acquisition Corp., a wholly owned subsidiary of HSI ("Merger Sub"), merged
with and into FHC and FHC survived as a wholly owned subsidiary of HSI, which
changed its name to "Foundation Health Systems, Inc." and thereby became the
Company. Pursuant to the Agreement and Plan of Merger (the "Merger
Agreement") that evidenced the Merger, FHC stockholders received 1.3 shares
of the Company's Class A Common Stock for every share of FHC common stock
held. The shares of the Company's Class A Common Stock issued to FHC's
stockholders in the Merger constituted approximately 61% of the outstanding
stock of the Company after the Merger and shares held by the Company's
stockholders prior to the Merger (i.e., the prior stockholders of
HSI) constituted approximately 39% of the outstanding stock of the Company
after the Merger.
In connection with the Merger, the Company amended its Certificate of
Incorporation to change the name of the Company as referenced above and to
increase the number of authorized shares of the Company's Common Stock to
380,000,000 shares consisting of 350,000,000 shares of Class A Common Stock and
30,000,000 shares of Class B Common Stock.
In connection with the Merger, the Company also, among other things,
amended the Company's By-Laws to effect certain changes to the governance
provisions of the Company following the Merger, including provisions related
to the structure of the Company's Board of Directors and the committees of
the Company's Board of Directors. Except in certain circumstances, during a
transaction period following the consummation of the Merger and up to, but
not including, the election of directors at the Company's May 2000 Annual
Meeting of Stockholders, the Company's Board of Directors is to consist of 11
members to be designated as set forth in the Company's Certificate of
Incorporation and By-Laws. Pursuant to such designations the Company's Board
of Directors is currently comprised of the following ten members (see
disclosure below relative to the current vacancy on the Board of Directors):
J. Thomas Bouchard, George Deukmejian, Thomas T. Farley, Patrick Foley, Earl
B. Fowler, Roger F. Greaves, Richard W. Hanselman, Malik M. Hasan, M.D.,
Richard J. Stegemeier and Raymond S. Troubh.
ITEM 1. LEGAL PROCEEDINGS
MEDAPHIS CORPORATION
On November 7, 1996 the Company filed a lawsuit against Medaphis
Corporation ("Medaphis") and its former Chairman and Chief Executive Officer
Randolph G. Brown entitled
25
HEALTH SYSTEMS INTERNATIONAL, INC. V. MEDAPHIS CORPORATION, RANDOLPH G. BROWN
AND DOES 1-50, case number BC 160414, Superior Court of California, County of
Los Angeles. The lawsuit arises out of the acquisition of Health Data
Sciences Corporation ("HDS") by Medaphis. In June 1996, the Company, the
owner of 1,234,544 shares (or 77%) of Series F Preferred Stock of HDS,
representing over sixteen percent of the total outstanding equity of HDS,
voted its shares in favor of the acquisition of HDS by Medaphis. The Company
received as the result of the acquisition 976,771 shares of Medaphis Common
Stock in exchange for its Series F Preferred Stock.
In its complaint, the Company alleges that Medaphis was actually a poorly
run company with sagging earnings in its core businesses, and had artificially
maintained its stock prices through a series of acquisitions and accounting
maneuvers which provided the illusion of growth while hiding the reality of its
weakening financial and business condition. The Company alleges that Medaphis,
Brown, and other insiders deceived the Company by failing to reveal that
Medaphis would shortly reveal a "write off" of up to $40,000,000 in
reorganization costs and would lower its earnings estimate for the following
year, thereby more than halving the value of the Medaphis shares received by the
Company. The Company alleges that these false and misleading statements were
contained in oral communications with the Company, as well as in the prospectus
provided by Medaphis to all HDS shareholders in connection with the HDS
acquisition. Further, despite knowing of the Company's discussions to form a
strategic alliance of its own with HDS, Medaphis and the individual defendants
wrongfully interfered with that prospective business relationship by proposing
to acquire HDS using Medaphis stock whose market price was artificially inflated
by false and misleading statements. These allegations of the Company constitute
violations of both federal and state securities laws, as well as constituting
fraud and other torts under state law. The Company is seeking either rescission
of the transaction or damages in excess of $38,000,000. The defendants have
denied the allegations in the complaint, and the Company is vigorously pursuing
its claims against Medaphis.
MONACELLI VS. GEM INSURANCE COMPANY
On December 29, 1994, a lawsuit entitled MARIO AND CHRISTIAN MONACELLI V.
GEM INSURANCE COMPANY, ET AL (Case No. CV94-20715) was initiated in Maricopa
County (Arizona) Superior Court against Gem Insurance Company, a subsidiary
of the Company ("Gem"), for bad faith and misrepresentation. Plaintiffs
subsequently asserted claims in the same action against their insurance
agent, Mark Davis, for negligence and misrepresentation. The Plaintiffs'
claims arose from the rescission of their health insurance policy based on
their alleged failure to disclose an X-ray, taken one year before the
Plaintiffs filled out their insurance application, which revealed an
undiagnosed mass on Mr. Monacelli's lung. Plaintiffs incurred approximately
$70,000 in medical expenses in connection therewith. Prior to trial, the
agent recanted certain portions of his deposition testimony and admitted that
the Plaintiffs had told him that Mr. Monacelli had undergone certain tests
which were not revealed on the application. Based on this new information,
Gem paid the Plaintiffs' medical expenses with interest.
The case went to trial in April of 1997 against Gem and the agent. A jury
verdict was ultimately rendered awarding the Plaintiffs $1 million in
compensatory damages and assessing fault 97% to Gem and 3% to the agent, Mark
Davis. In addition, the jury awarded $15 million in punitive damages against
Gem. The Monacellis subsequently filed a motion seeking $4 million in
attorneys' fees. Post-trial motions (including Gem's motion for judgment
notwithstanding the verdict and motion for new trial/motion for remittitur)
and the Plaintiffs' motion for an award of attorneys' fees are currently
pending. In addition, on July 15, 1997 Gem filed a complaint against Mr.
Davis and his spouse in Maricopa County (Arizona) Superior Court (Case No.
CV97-13053) asserting a claim for indemnity against Mr. Davis with respect to
the MONACELLI case.
MISCELLANEOUS PROCEEDINGS
The Company and certain of its subsidiaries are also parties to various
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.
26
ITEM 2. CHANGES IN SECURITIES
REVOLVING CREDIT FACILITY
On July 8, 1997, the Company entered into a Credit Agreement (the "Credit
Agreement") among the Company, the banks identified therein (the "Banks") and
Bank of America National Trust and Savings Association (the "Bank of America"),
in its capacity as the Administrative Agent, pursuant to which the Company
obtained an unsecured five-year $1.5 billion revolving credit facility. The
Credit Agreement replaced (i) the Company's prior Amended and Restated Credit
Agreement, dated as of April 26, 1996, with Bank of America, as agent, providing
for a $700 million unsecured revolving credit facility and (ii) Foundation
Health Corporation's ("FHC's") prior (A) Revolving Credit Agreement, dated as of
December 5, 1994, with Citicorp USA, Inc., as agent, providing for a $300
million unsecured revolving credit facility (the "Old FHC Credit Agreement") and
(B) Revolving Credit Agreement, dated as of December 17, 1996, with Citibank,
N.A., as administrative agent, providing for a $200 million unsecured revolving
credit facility.
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 so long as the sum of such dividends, redemptions and
acquisitions does not exceed $300 million plus 25% of the net income of the
Company and its subsidiaries in fiscal year 1998 plus 50% of the net income of
the Company and its subsidiaries in fiscal year 1999 and subsequent years
(calculated on a cumulative consolidated basis).
Under the Credit Agreement, the Company is: (i) obligated to maintain at
all times a Total Leverage Ratio (as such term is defined in the Credit
Agreement) not to exceed 3 to 1, a Fixed Coverage Charge (as such term is
defined in the Credit Agreement) of not less than 2.75 to 1 and to preserve its
combined net worth at not less than the sum of 85% of the combined net worth on
June 30, 1997 plus 50% of the net income of the Company and its subsidiaries
arising after June 30, 1997 (calculated on a cumulative consolidated basis);
(ii) obligated to limit liens on its assets to those incurred in the normal
course and for taxes and other similar obligations; and (iii) subject to
customary covenants, to (A) dispose of assets only in the ordinary course and
generally at fair value and (B) restrict acquisitions, mergers, consolidations,
loans, leases, joint ventures, contingent obligations and certain transactions
with affiliates to those permitted under the Credit Agreement.
In connection with entering into the Credit Agreement, FHC obtained a
waiver under a Guaranty Agreement, dated as of May 25, 1997 (the "FHC
Guaranty"), until August 15, 1997 in order to enable the Company to negotiate
the replacement by the Company of FHC as the guarantor
27
under the FHC Guaranty. The FHC Guaranty incorporates the representations,
warranties and covenants of the Old FHC Credit Agreement, as amended from
time to time, and it further provides that to the extent the Old FHC Credit
Agreement is terminated and is replaced with a similar credit facility, the
representations, warranties and covenants of such new credit facility are
automatically incorporated into the FHC Guaranty. Since the Old FHC Credit
Agreement was replaced with a similar credit facility, i.e., the Credit
Agreement, and FHC is not a party to the Credit Agreement, the replacement by
the Company of FHC as the guarantor under the FHC Guaranty was required.
Upon replacement by the Company of FHC as the guarantor, FHC will be relieved
of all of its obligations under the FHC Guaranty and all other agreements
relating thereto.
The guarantor under the FHC Guaranty guarantees certain obligations of
Foundation Health Facilities, Inc., a California corporation ("FHF"), under:
(i) a Lease Agreement, dated as of May 25, 1995, between First Security Bank,
National Association (f/k/a First Security Bank of Utah, N.A.) (the "Owner
Trustee"), as lessor, and FHF, as lessee, providing for the leasing of certain
real property; (ii) an Agency Agreement, dated as of May 25, 1995, between the
Owner Trustee and FHF, providing for FHF to act as agent for the Owner Trustee
in the acquisition, development and construction of certain real property; and
(iii) any other agreement entered into by FHF in connection with the
Participation Agreement, dated as of May 25, 1997, among FHF, FHC, the Owners
Trustee, and NationsBank of Texas, N.A., as the administrative agent for certain
financial institutions parties to a Credit Agreement, dated as of May 25, 1995,
with the Owner Trustee, as the borrower.
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
commences a tender offer for 15% of the Class A Common Stock (each event causing
a "Distribution Date").
28
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 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.
In connection with the Merger, the Company entered into Amendment No. 1
(the "Amendment") to the Rights Agreement to exempt the Merger and related
transactions from triggering the Rights. In addition, the Amendment modifies
certain terms of the Rights Agreement applicable to the determination of certain
"Adverse Persons," which modifications became effective upon consummation of the
Merger.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the quarter ended June 30, 1997.
ITEM 5. OTHER INFORMATION
REVOLVING CREDIT FACILITY
As indicated in Item 2 above, on July 8, 1997 the Company executed the
Credit Agreement, which provides for an unsecured five-year $1.5 billion
revolving credit facility, to replace (i) the Company's prior $700 million
unsecured revolving credit facility with Bank of America, as agent and (ii)
FHC's prior (A) $300 million unsecured revolving credit facility with Citicorp
USA, Inc., as agent and (B) $200 million unsecured revolving credit facility
with Citibank, N.A., as administrative agent.
The facility is available to the Company and its subsidiaries for general
corporate purposes, including Permitted Acquisitions and Joint Ventures. As
of July 31, 1997, the Company had drawn approximately $860 million under the
facility.
29
Bank of America is the administrative agent and co-lead bank with
Citibank N.A. for the other participating banks named in the Credit
Agreement. At the election of the Company, and subject to customary
covenants, loans can be initiated on a bid or committed basis and will carry
interest at offshore or domestic rates, but subject to the applicable LIBOR
Rate or the Base Rate (which is the higher of .50% above the Federal Funds
Rate or the Bank of America "reference rate"). Actual rates on borrowings
under the facility will vary based on competitive bidding and the Company's
long-term senior unsecured debt rating and Total Leverage Ratio (as such term
is defined in the Credit Agreement) at the time of the borrowing. The
facility is available for five years, until July 2002, but may be extended,
under certain circumstances, for two additional years until July 2004.
Loans under the facility are unsecured but the Company and its
subsidiaries are subject to affirmative and negative covenants. As described
in Item 2 above, these include limitations on the payment of cash dividends
on the Company's capital stock and, in certain cases, the redemption or
repurchase of capital stock or securities. In addition to obligations
incurred under the facility, the Company and its subsidiaries are entitled to
incur certain types of Indebtedness in an aggregate amount of up to $500
million.
Under the Credit Agreement, the Company is: (i) obligated to maintain at
all times a Total Leverage Ratio not to exceed 3 to 1, a Fixed Charge Coverage
of not less than 2.75 to 1 and to preserve its combined net worth at not less
than the sum of 85% of the combined net worth on June 30, 1997 plus 50% of the
net income of the Company and its subsidiaries arising after June 30, 1997
(calculated on a cumulative consolidated basis); (ii) obligated to limit liens
on its assets to those incurred in the normal course and for taxes and other
similar obligations; and (iii) subject to customary covenants, to (A) dispose of
assets only in the ordinary course and generally at fair value and (B) restrict
acquisitions, mergers, consolidations, loans, leases, joint ventures, contingent
obligations and certain transactions with affiliates to those permitted under
the Credit Agreement.
CAUTIONARY STATEMENTS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, HSI has previously filed with its Annual
Report on Form 10-K for the year ended December 31, 1996 and FHC has
previously filed with its Annual Report on Form 10-K/A Amendment No. 3 for
the year ended June 30, 1996 certain cautionary statements identifying
important risk factors that could cause the Company's actual results to
differ materially from those projected in forward-looking statements of the
Company made by or on behalf of the Company.
The Company wishes to caution readers that these factors, among others,
could cause the Company's actual financial or enrollment results to differ
materially from those expressed in any projected, estimated or forward-looking
statements relating to the Company. The factors should be considered in
conjunction with any discussion of operations or results by the Company or its
representatives, including any forward-looking discussion, as well as comments
contained in press releases, presentations to securities analysts or investors,
or other communications by the Company.
30
In making these statements, the Company was not and is not undertaking to
address or update each factor in future filings or communications regarding the
Company's business or results, and is not undertaking to address how any of
these factors may have caused changes to discussions or information contained in
previous filings or communications. In addition, certain of these matters may
have affected the Company's past results and may affect future results.
RECENT DEVELOPMENTS
RECENT MANAGEMENT CHANGES
On May 8, 1997, the Company announced that Daniel D. Crowley had been
replaced by Malik M. Hasan, M.D. as the Chairman of the Board of Directors of
the Company, and that Mr. Crowley would remain as a director and serve as a
consultant to the Company for three years. It was also announced that Dr. Hasan
would retain the office of Chief Executive Officer of the Company, and that Jay
M. Gellert was elected to the offices of President and Chief Operating Officer
of the Company.
Effective July 16, 1997, Mr. Crowley resigned as a director of the Company.
As a result, there currently exists a vacancy in the Class I directors which
will be filled pursuant to the Merger Agreement after an appropriate
recommendation from the Committee on Directors. The Committee on Directors
intends to conduct a process of screening qualified individuals for this
vacancy.
Allen J. Marabito resigned as Senior Vice President and General Counsel of
the Company as of May 1, 1997 and entered into a Consulting Agreement with the
Company as of such date for a two year term. Pursuant to such Consulting
Agreement, the Company and Mr. Marabito also entered into a mutual general
release.
FIRST OPTION HEALTH PLAN
On April 30, 1997, the Company purchased convertible debentures (the "FOHP
Debentures") of FOHP, Inc., a New Jersey corporation ("FOHP"), in the aggregate
principal amount of approximately $51.7 million. The FOHP Debentures are
convertible into up to 71 percent of the outstanding equity of FOHP at the
Company's discretion. At any time during the 1999 calendar year, the Company
may acquire the remaining shares of FOHP not owned thereby pursuant to a tender
offer, merger, combination or other business combination transaction for
consideration (to be paid in cash or stock of the Company) equal to the value of
such FOHP stock based on appraiser determinations.
FOHP (headquartered in Red Bank, New Jersey) is owned by physicians,
hospitals and other health care providers and is the sole shareholder of
First Option Health Plan of New Jersey, Inc. a New Jersey corporation and a
wholly-owned subsidiary of FOHP ("FOHP-NJ"). FOHP-NJ is a managed health
care company providing commercial products for businesses and
31
individuals, along with Medicare, Medicaid and Workers' Compensation
programs. FOHP-NJ currently has more than 250,000 members in New Jersey
enrolled in its commercial, Medicare, Medicaid and PPO programs.
As part of the transaction, the Company also provides a variety of
management services to FOHP, including provider contracting, utilization review
and quality assurance and employee relations, sales and marketing and strategic
planning. The Company receives monthly management fees from FOHP for such
services in an amount equal to two percent of FOHP's premium revenue. The
Company, at its option, may also provide information systems and claims
processing services to FOHP. Approximately $1,700,000 of the $51.7 million
principal amount of the FOHP Debentures reflected fees paid to the Company by
FOHP for such management services provided by the Company prior to the closing
of the sale of the FOHP Debentures; such principal amount was immediately
converted into FOHP common stock.
ADVANTAGE HEALTH
On April 1, 1997, the Company completed the acquisition from St. Francis
Health System of Advantage Health, a group of managed health care companies with
approximately 40,000 full-risk members in Western Pennsylvania, Ohio and West
Virginia, for $12.5 million in cash. In 1996 Advantage Health recorded revenue
of approximately $56 million. St. Francis has a short-term option to reacquire
a 20% interest in Advantage Health for $2.5 million.
Advantage Health remains a party to long-term provider agreements with the
St. Francis Health System and a management agreement with the Company. The
Company will operate Advantage Health under combined management with its
Philadelphia-based plan, QualMed Plans for Health, Inc.
PACC
Pursuant to the Agreement and Plan of Reorganization, dated as of March 20,
1997 and effective on April 9, 1997 (the "Reorganization Agreement"), among the
Company, QualMed Health Plan, Inc., an Oregon corporation and an indirect
wholly-owned subsidiary of the Company ("QMO"), and PACC HMO and PACC Health
Plans, each an Oregon non-profit corporation (PACC HMO and PACC Health Plans
being referred to herein, collectively, as "PACC"), the Company agreed to
acquire PACC for an undisclosed amount.
PACC (based in Clackamas, Oregon) has health plan operations in Oregon and
Washington, with approximately 116,000 medical members (approximately 108,000 of
which are located in the Portland, Oregon area). Approximately 67,000 of such
members are in PACC HMO (a commercial health maintenance organization), with the
balance in PACC Health Plans (primarily a preferred provider organization).
PACC recorded more than $133 million in revenues in 1996.
32
The transaction is structured as a merger of PACC into QMO, with QMO as the
surviving corporation to be renamed FHS of Oregon, Inc. or a similar-type name.
Such merger will be immediately preceded by an acquisition and assumption by
QualMed Washington Health Plan, Inc. (a Washington corporation and indirect
wholly-owned subsidiary of the Company) of various contracts of PACC relating to
PACC's health care service contractor business in the State of Washington and
the acquisition and assumption by QualMed Health and Life Insurance Company (an
insurance company domesticated under the laws of the State of Colorado and an
indirect wholly-owned subsidiary of the Company) of various contracts of PACC
relating to PACC's health maintenance organization business in the State of
Washington.
The Reorganization Agreement contemplates that PACC will organize
Northwest Health Foundation (the "PACC Foundation") as an Oregon nonprofit
public benefit corporation which will receive the net acquisition consideration
proceeds. The PACC Foundation will assume certain of PACC's obligations under
the Reorganization Agreement (including indemnification obligations) at closing.
Consummation of the PACC acquisition transaction is subject to approvals
from regulatory authorities and other customary conditions of closing.
PHYSICIANS HEALTH SERVICES, INC.
On May 8, 1997, the Company entered into a definitive agreement to
acquire Physicians Health Services, Inc. ("PHS") for $29.25 per share, or a
total consideration of approximately $300 million. PHS is a 440,000-member
health plan with operations in the New York metropolitan area, including
northern New Jersey, and throughout the state of Connecticut. Consummation of
the transaction is subject to customary conditions, including approval by
PHS's stockholders and the receipt of all necessary governmental
authorizations. In connection with entering into the definitive acquisition
agreement, the Greater Bridgeport Individual Practice Association, Inc.,
holding a majority of the outstanding voting power of PHS stock, has agreed
to vote in favor of the transaction. The Company will fund the acquisition
with cash on hand and existing bank credit lines. The Company presently
expects that the transaction will close in the third quarter or fourth
quarter of 1997.
GEM INSURANCE COMPANY
Gem Insurance Company ("Gem") was acquired by the Company as a result of
FHC's acquisition of Intergroup Healthcare Corporation and the Thomas Davis
Medical Center in 1994. Gem is a Utah-domiciled life and health insurance
company, admitted to write group and individual medical and life insurance in
nine states and it has policies in force in the following seven states:
Arizona, Colorado, Nebraska, Nevada, New Mexico, Texas and Utah. It is
licensed but not active in Oregon and Washington.
33
As referenced at Part I above, the Company has reached definitive
agreements relating to a reinsurance transaction with The Centennial Life
Insurance Company ("Centennial") involving Gem to be effective as of April 1,
1997.
In this connection, pursuant to a Quota Share Reinsurance Agreement (the
"Reinsurance Agreement"), Gem will cede to Centennial on an indemnity basis
one hundred percent (100%) of the policy liabilities of Gem in return for all
of Gem's premium income, policy reserves and a cash payment by the Company.
In addition, pursuant to an Administration, Management and Transfer Agreement
(the "Administration Agreement"), Centennial will: (i) provide complete
administration of the policies subject to the Reinsurance Agreement; (ii)
offer employment to all Gem employees; (iii) sublet the office space of Gem;
and (iv) purchase all the furniture, equipment, computer hardware and
software owned of Gem.
Although the transaction is subject to receipt of appropriate regulatory
approvals, such approval is imminent and will authorize the retroactive April 1,
1997 effective date referenced above.
CHRISTIANIA GENERAL INSURANCE CORPORATION
On May 14, 1997, the Business Insurance Group, Inc., a subsidiary of the
Company ("BIG"), acquired the Christiania General Insurance Corporation of
New York ("CGIC"). CGIC was purchased by BIG to more effectively compete in
the workers' compensation and group accident and health markets outside of
California. CGIC is currently licensed in 47 states, with 27 workers'
compensation licenses and 23 group accident and health licenses.
THE CALIFORNIA WELLNESS FOUNDATION
Pursuant to the Amended Foundation Shareholder Agreement, dated as of
January 28, 1992 (the "CWF Shareholder Agreement"), by and among the Company,
The California Wellness Foundation (the "CWF") and certain stockholders (the
"HNMH Stockholders") of HN Management Holdings, Inc. (a predecessor to the
Company) ("HNMH") named therein, the CWF is subject to various volume and manner
of sale restrictions specified in the CWF Shareholder Agreement which limit the
number of shares that the CWF may dispose of prior to December 31, 1998.
Under the relevant provisions of California law, when a corporation
converts from nonprofit to for-profit corporate status, the equivalent of the
fair market value of the nonprofit corporation must be contributed to a
successor charity that has a charitable purpose consistent with the purposes of
the nonprofit entity. The CWF was formed to be the charitable recipient of the
conversion settlement when Health Net (a subsidiary of the company) effected a
conversion from nonprofit to for-profit status, which occurred in February 1992
(the "Conversion"). In connection with the Conversion, Health Net issued to the
CWF promissory notes in the original principal amount of $225 million (the "CWF
Notes") and shares of Class B Common Stock (which immediately prior to the
business combination involving HNMH and QualMed, Inc. were split to become
25,684,152 shares of Class B Common Stock then held by the CWF). While such
shares are held by the CWF, they are entitled to the same economic benefit of
Class A Common Stock, but are non-voting in nature. If the CWF sells or
transfers such shares to an unrelated third party, they automatically convert to
Class A Common Stock.
In addition, the CWF Shareholder Agreement, in conjunction with the Letter
Agreement executed by the Company and the Trustees of a Trust (holding shares on
behalf of the HNMH
34
Stockholders) on March 9, 1995 and ratified by the Company's Board of
Directors on March 16, 1995 (the "Letter Agreement") requires the CWF to
offer its shares of Class B Common Stock to the Company prior to selling such
shares to any other person. In this respect, the CWF Shareholder Agreement
permits the CWF to offer and sell up to 80% of the CWF's interest in the
Class B Common Stock (or all but 5,136,830 of such shares) to the Company
prior to December 31, 1998. The CWF Shareholder Agreement, in conjunction
with the Letter Agreement, requires the CWF to provide the Company with
notice on or before January 31 of each year setting forth the number of
shares, if any, being offered to the Company. The Company then has 45 days
following receipt of such notice to notify the CWF of its intention to
purchase such number of shares. On January 27, 1997, the CWF provided the
Company with notice of its offer to sell 3,852,653 shares of Class B Common
Stock, provided that at the Company's option the number of shares could be
increased to not more than 5,000,000 shares. Pursuant to such offer and
subsequent letter agreements (collectively, the "1997 Notice Materials") the
CWF agreed to extend until June 20, 1997 the time by which the Company could
notify the CWF of its intention to purchase or redeem such number of shares
of Class B Common Stock. Accordingly, after appropriate notice was given and
effective June 27, 1997, the Company redeemed 4,550,000 shares of Class B
Common Stock from the CWF at a price of $24.469 per share.
In addition, on June 18, 1997, the Company provided its consent under the
CWF Shareholder Agreement to permit the CWF to sell 3,000,000 shares of Class
B Common Stock to an unrelated third party. Pursuant to the 1997 Notice
Materials, the CWF also retained the right to sell the balance of the
5,000,000 shares not redeemed by the Company (or up to 450,000 shares) to
unrelated third parties. Sales of 298,300 of such 450,000 shares to
unrelated third parties had been consummated as of August 12, 1997. Pursuant
to the Company's Certificate of Incorporation, such 3,000,000 shares and
298,300 shares of Class B Common Stock automatically converted into shares of
Class A Common Stock in the hands of such third parties.
As a result of such transactions, the CWF now holds 11,449,342 shares of
Class B Common Stock and, as of June 30, 1997, approximately $19 million in
principal of the CWF Notes remained outstanding.
REDEMPTION OF FHC PUBLIC DEBT
FHC, a subsidiary of the Company, consummated a cash tender offer on June
27, 1997 of all of its $125 million outstanding principal amount of 7 3/4%
Senior Notes due 2003 (the "FHC Notes"). As part of this repurchase, FHC and
the trustee for the FHC Notes also executed a supplemental indenture which
removed substantially all of the restrictive covenants contained in the
Indenture for the FHC Notes.
The price paid for each tendered FHC Note was based on a fixed spread of 25
basis points over the reference yield of the 6 1/4% U.S. Treasury Notes due
February 15, 2003, plus accrued and unpaid interest to the applicable settlement
date. Accordingly, the reference yield was
35
6.365%, the reference yield plus the fixed spread was 6.615% and the purchase
price per $1,000 principal amount of the FHC Notes was $1,054.77, plus
accrued and unpaid interest.
36
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 by reference herein).
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 by
reference herein).
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 by
reference herein).
*3.2 Fifth Amended and Restated Bylaws of the Registrant, a copy of which
is filed herewith.
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
by reference herein).
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
by reference herein).
4.3 Form of Indenture of Foundation Health Corporation ("FHC") (filed as
an exhibit to FHC's Registration Statement on Form S-3 (File No.
33-68684), which is incorporated by reference herein).
4.4 Form of Senior Notes of FHC (filed as an exhibit to FHC's
Registration Statement on Form S-3 (File No. 33-68684), which is
incorporated by reference herein).
37
10.1 Employment Agreement, dated August 28, 1993, by and among QualMed,
Inc., HN Management Holdings, Inc. and Malik M. Hasan, M.D. (filed
as Exhibit 10.18 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 by reference herein).
10.2 Employment Agreement, dated August 28, 1993, by and among QualMed,
Inc., HN Management Holdings, Inc. and Dale T. Berkbigler, M.D.
(filed as Exhibit 10.20 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 by reference herein).
10.3 Severance Payment Agreement, dated as of April 25, 1994, among the
Company, Health Net and James J. Wilk (filed as Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1994, which is incorporated by reference herein).
10.4 Severance Payment Agreement dated March 31, 1997 between the Company
and Health Net and James J. Wilk (filed as Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997, which is incorporated by reference herein).
10.5 Severance Payment Agreement, dated as of April 25, 1994, among the
Company, QualMed, Inc. and B. Curtis Westen (filed as Exhibit 10.10
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994, which is incorporated by reference herein).
10.6 Letter Agreement dated April 23, 1997 between B. Curtis Westen and
the Company (filed as Exhibit 10.6 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997, which is
incorporated by reference herein).
10.7 Amendment No. 1 to Employment Agreement dated as of April 25, 1994,
by and among the Company, QualMed, Inc. and Malik Hasan, M.D. (filed
as Exhibit 10.16 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994, which is incorporated by reference
herein).
10.8 Amended and Restated Employment Agreement, dated March 10, 1997, by
and between the Company and Malik M. Hasan, M.D. (Filed as Exhibit
10.3 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, which is incorporated by reference herein).
38
10.9 Amendment No. 1 to Employment Agreement dated as of April 27,
1994, by and among the Company, QualMed, Inc. and Dale T.
Berkbigler, M.D. (filed as Exhibit 10.17 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994, which is
incorporated by reference herein).
10.10 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 by
reference herein).
10.11 The Company's Second Amended and Restated 1991 Stock Option Plan
(filed as Exhibit 10.30 to Registration Statement on Form S-4
(File No. 33-86524) which is incorporated by reference herein).
10.12 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 by
reference herein).
10.13 The Company's Employee Stock Purchase Plan (filed as Exhibit 10.33
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 by reference herein).
10.14 The Company's Performance-Based Annual Bonus Plan (filed as
Exhibit 10.35 to Registration Statement on Form S-4
(File No. 33-86524) which is incorporated by reference herein).
10.15 Deferred Compensation Agreement dated as of March 3, 1995, by and
among Malik M. Hasan, M.D., the Company and the Compensation and
Stock Option Committee of the Board of Directors of the Company
(filed as Exhibit 10.31 to the Company's Annual Report on Form
10-K for the year ended December 31, 1994, which is incorporated by
reference herein).
10.16 Trust Agreement for Deferred Compensation Arrangement for Malik M.
Hasan, M.D., dated as of March 3, 1995, by and between the Company
and Norwest Bank Colorado N.A. (filed as Exhibit 10.32 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1994, which is incorporated by reference herein).
10.17 Registration Rights Agreement dated as of March 2, 1995 between
the Company and the Foundation (filed as Exhibit No. 28.2 to the
Company's Current Report on Form 8-K dated March 2, 1995, which is
incorporated by reference herein).
39
10.18 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 by
reference herein).
10.19 Amended and Restated Credit Agreement dated as of April 26, 1996
among the Company, Bank of America National Trust and Savings
Association, as Agent, and financial institutions party thereto
(filed as Exhibit 10.1 to the Company's Current Report on Form 8-K
dated May 3, 1996, which is incorporated by reference herein).
10.20 Amendment No. 1 to Credit Agreement dated as of May 10, 1996 among
the Company, Bank of America National Trust and Savings
Association, as Agent, and financial institutions party thereto
(filed as Exhibit 10.32 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996, which is incorporated
by reference herein).
10.21 Amendment No. 2 to Credit Agreement dated as of May 28, 1996 among
the Company, Bank of America National Trust and Savings
Association, as Agent, and financial institutions party thereto
(filed as Exhibit 10.33 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996, which is incorporated by
reference herein).
10.22 Amendment No. 3 to Credit Agreement dated as of January 31, 1997
among the Company, Bank of America National Trust and Savings
Association, as Agent, and financial institutions party thereto
(filed as Exhibit 10.33 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996, which is incorporated by
reference herein).
*10.23 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), a copy of
which is filed herewith.
10.24 Employment Letter Agreement dated May 28, 1996 between Michael D.
Pugh and QualMed, Inc. (filed as Exhibit 10.35 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
which is incorporated by reference herein).
10.25 Employment Letter Agreement dated June 4, 1996 between Arthur M.
Southam and the Company and Health Net (filed as Exhibit 10.36 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, which is incorporated by reference herein).
40
10.26 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 by reference herein).
10.27 Employment Letter Agreement dated September 30, 1996 between
Douglas C. Werner and the Company (filed as Exhibit 10.38 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, which is incorporated by reference herein).
10.28 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 by reference
herein).
10.29 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 by reference herein).
10.30 Amended and Restated Employment Agreement, dated December 16,
1996, by and among the Company, Foundation Health Corporation and
Daniel D. Crowley (filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-4 (File No. 333-19273), which is
incorporated by reference herein).
10.31 Employment Agreement Termination Agreement, dated as of May 1,
1997, by and between Daniel D. Crowley, the Company and FHC (filed
as Exhibit 10.32 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997).
10.32 Amended and Restated Employment Agreement, dated December 16,
1996, by and among the Company, Foundation Health Corporation and
Kirk A. Benson (filed as Exhibit 10.2 to the Company's
Registration Statement on Form S-4 (File No. 333-19273), which is
incorporated by reference herein).
10.33 Amended and Restated Employment Agreement, dated December 16,
1996, by and among the Company, Foundation Health Corporation and
Jeffrey L. Elder (filed as Exhibit 10.4 to the Company's
Registration Statement on Form S-4 (File No. 333-19273), which is
incorporated by reference herein).
41
10.34 Amended and Restated Employment Agreement, dated December 16,
1996, by and among the Company, Foundation Health Corporation and
Allen J. Marabito (filed as Exhibit 10.5 to the Company's
Registration Statement on Form S-4 (File No. 333-19273), which is
incorporated by reference herein).
*10.35 Consulting Agreement, dated as of May 1, 1997, between the
Company, FHC and Allen J. Marabito, a copy of which is filed
herewith.
10.36 Foundation Health Corporation Employee Stock Purchase Plan (filed
as Exhibit 4.3 to the Company's Registration Statement on Form S-8
(File No. 333-24621), which is incorporated by reference herein).
10.37 Foundation Health Corporation Profit Sharing and 401(k) Plan
(Amended and Restated effective January 1, 1994) (filed as Exhibit
4.4 to the Company's Registration Statement on Form S-8 (File No.
333-24621), which is incorporated by reference herein).
10.38 1990 Stock Option Plan of Foundation Health Corporation (filed as
Exhibit 4.5 to the Company's Registration Statement on Form S-8
(File No. 333-24621), which is incorporated by reference herein).
10.39 1992 Nonstatutory Stock Option Plan of Foundation Health
Corporation (filed as Exhibit 4.6 to the Company's Registration
Statement on Form S-8 (File No. 333-24621), which is incorporated
by reference herein).
10.40 1989 Stock Plan of Business Insurance Corporation (as Amended and
Restated Effective September 22, 1992) (filed as Exhibit 4.7 to
the Company's Registration Statement on Form S-8 (File No.
333-24621), which is incorporated by reference herein).
10.41 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 by reference herein).
10.42 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
by reference herein).
10.43 1993 Nonstatutory Stock Option Plan of Foundation Health
Corporation (as amended and restated September 7, 1995) (filed as
Exhibit 4.10 to the Company's Registration Statement on Form S-8
(File No. 333-24621), which is incorporated by reference herein).
42
10.44 FHC Directors Retirement Plan (filed as an exhibit to FHC's Form
10-K for the year ended June 30, 1994 filed with the Commission on
September 24, 1994, which is incorporated by reference herein).
*10.45 Foundation Health Systems, Inc. 1997 Stock Option Plan, a copy of
which is filed herewith.
*10.46 Foundation Health Systems, Inc. Third Amended and Restated
Non-Employee Director Stock Option Plan, a copy of which is filed
herewith.
*10.47 Foundation Health Systems, Inc. Employee Stock Purchase Plan, a
copy of which is filed herewith.
*10.48 Foundation Health Systems, Inc. Performance-Based Annual Bonus
Plan, a copy of which is filed herewith.
10.49 Participation Agreement dated as of May 25, 1995 among Foundation
Health Medical Services, as Construction Agent and Lessee, FHC, as
Guarantor, First Security Bank of Utah, N.A., as Owner Trustee,
Sumitomo Bank Leasing and Finance, Inc., The Bank of Nova Scotia
and NationsBank of Texas, N.A., as Holders and NationsBank of
Texas, N.A., as Administrative Agent for the Lenders; and Guaranty
Agreement dated as of May 25, 1995 by FHC for the benefit of First
Security Bank of Utah, N.A. (filed as an exhibit to FHC's Form 10-K
for the year ended June 30, 1995, filed with the Commission on
September 27, 1995, which is incorporated by reference herein).
10.50 FHC's Deferred Compensation Plan, as amended and restated (filed
as an exhibit to FHC's Form 10-K for the year ended June 30, 1995,
filed with the Commission on September 27, 1995, which is
incorporated by reference herein).
10.51 FHC's Supplemental Executive Retirement Plan, as amended and
restated (filed as an exhibit to FHC's Form 10-K for the year
ended June 30, 1995, filed with the Commission on September 27,
1995, which is incorporated by reference herein).
10.52 FHC's Executive Retiree Medical Plan, as amended and restated
(filed as an exhibit to FHC's Form 10-K for the year ended June
30, 1995, filed with the Commission on September 27, 1995, which
is incorporated by reference herein).
10.53 Agreement and Plan Reorganization dated January 9, 1996 by and
between FHC and Managed Health Network, Inc. (filed as Annex 1 of
Proxy Statement/Prospectus contained in FHC's Registration
Statement on Form S-4 (File No. 333-00517), which is incorporated
by reference herein).
43
10.54 Stock and Note Purchase Agreement by and between FHC, Jonathan H.,
Schoff, M.D., FPA Medical Management, Inc., FPA Medical 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 by reference herein).
10.55 $300 Million Revolving Credit Agreement (the "FHC Credit
Agreement") dated as of December 5, 1994, among FHC, as Borrower,
Citicorp USA, Inc., as Administrative Agent, Wells Fargo Bank,
N.A. and NationsBank of Texas, N.A., as Co-Agents and Citicorp
Securities, Inc., as Arranger, and the Other Banks and Financial
Institutions Party thereto (filed as an Exhibit to FHC's quarterly
report on Form 10-Q for the quarter ended December 31, 1994 filed
with the Commission on February 14, 1994, which is incorporated by
reference herein).
10.56 First Amendment Agreement (to the FHC Credit Agreement) dated as
of August 9, 1995 among FHC, as Borrower, the Lenders parties to
the FHC Credit Agreement, Citicorp USA, Inc., as Administrative
Agent, Wells Fargo Bank, N.A. and NationsBank of Texas, N.A., as
Co-Agents, and Citicorp Securities, Inc., as Arranger (filed as
Exhibit 10.52 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997, which is incorporated by
reference herein).
10.57 Second Amendment Agreement (to the FHC Credit Agreement), dated as
of June 28, 1996 among FHC, the Lenders and Citicorp USA, Inc.
(filed as Exhibit 10.53 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997, which is incorporated
by reference herein).
10.58 Third Amendment Agreement and Waiver (to the FHC Credit Agreement)
dated December 13, 1996 among FHC, the Lenders and Citibank, N.A.
(as successor to Citicorp USA, Inc.), as Administrative Agent
(filed as Exhibit 10.54 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997, which is incorporated
by reference herein).
10.59 Fourth Amendment Agreement and Waiver (to the FHC Credit
Agreement) dated January 28, 1997 among FHC, the Lenders and
Citibank, N.A. (as successor to Citicorp USA, Inc.), as
Administrative Agent (filed as Exhibit 10.55 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1997, which is incorporated by reference herein).
44
10.60 Fifth Amendment Agreement (to the FHC Credit Agreement) dated
April 1, 1997 among FHC, the Lenders and Citibank, N.A. (as
successor to Citicorp USA, Inc.), as Administrative Agent (filed
as Exhibit 10.56 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997, which is incorporated by
reference herein).
10.61 $200 million Revolving Credit Agreement (the "FHC Revolving Credit
Agreement") dated as of December 17, 1996 among FHC, the Lenders
and Citibank, N.A., as Administrative Agent for the Lenders (filed
as Exhibit 10.57 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997, which is incorporated by
reference herein).
10.62 First Amendment Agreement and Waiver (to the FHC Revolving Credit
Agreement) dated as of January 28, 1997 among FHC, the Lenders and
Citibank, N.A., as Administrative Agent for the Lenders (filed as
Exhibit 10.58 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997, which is incorporated by
reference herein).
10.63 Second Amendment Agreement and Waiver (to the FHC Revolving Credit
Agreement) among FHC, the Lenders and Citibank, N.A., as
Administrative Agent for the Lenders (filed as Exhibit 10.59 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997, which is incorporated by reference herein).
10.64 Lease Agreement between HAS-First Associates and FHC dated August
1, 1998 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 by reference herein).
10.65 Agreement and Plan of Reorganization dated as of June 27, 1994 by
and among FHC, CareFlorida Health Systems, Inc., and the other
parties signatory thereto (filed as an exhibit to FHC's Current
Report on Form 8-K filed with the Commission on June 28, 1994,
which is incorporated by reference herein).
10.66 Agreement and Plan of Merger dated as of July 28, 1994 between FHC
and Intergroup Healthcare Corporation (filed as an exhibit to
FHC's Current Report on Form 8-K filed with the Commission on
August 9, 1994, which is incorporated by reference herein).
10.67 Agreement and Plan of Merger dated as of July 28, 1994 between FHC
and Thomas-Davis Medical Centers, P.C. (filed as an exhibit to
FHC's Current Report on Form 8-K filed with the Commission on
August 9, 1994, which is incorporated by reference herein).
45
*11.1 Statement relative to computation of earnings per share of the
Company, a copy of which is filed herewith.
21.1 Subsidiaries of the Company's (filed as Exhibit 21.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997, which is incorporated by reference herein).
*27.1 Financial Data Schedule, a copy of which is filed with the EDGAR
version of this filing.
* A copy of the Exhibit is filed herewith.
46
(b) REPORTS ON FORM 8-K
The following Current Reports on Form 8-K were filed by the Company during
the quarterly period ended June 30, 1997:
1. A Current Report on Form 8-K dated April 1, 1997 was filed by the
Company on April 3, 1997 announcing consummation of the merger
transaction (the "Merger") involving the Company and Foundation Health
Corporation ("FHC").
2. A Current Report on Form 8-K/A was filed by the Company on May 9,
1997 providing the financial information required by Item 7(a) and
Item 7(b) of Form 8-K with respect to the Merger referenced above. In
this connection, the following financial statements were incorporated
by reference into the Form 8-K/A: (i) audited consolidated financial
statements for each of the years in the three year period ended June
30, 1996 (contained in the Annual Report on Form 10-K/A Amendment No.
3 of FHC (File No. 1-10540) for the year ended June 30, 1996 filed
with the Commission on January 10, 1997); (ii) unaudited condensed
consolidated financial statements for the three month periods ended
September 30, 1996 and 1995 (contained in the Quarterly Report on Form
10-Q of FHC (File No. 1-10540) for the quarter ended September 30,
1996 filed with the Commission on November 19, 1996); and (iii)
unaudited pro forma combined condensed financial statements of the
Company (and the notes thereto) contained on pages 49 through 56 of
the Prospectus contained in the Company's Amendment No. 1 to the
Registration Statement on Form S-4 (File No. 333-19273) filed with the
Commission on January 10, 1997.
3. A Current Report on Form 8-K dated June 16, 1997 was filed by the
Company on June 18, 1997 announcing: (i) the commencement by FHC on
June 16, 1997 of a cash tender offer for any and all of the $125
million outstanding principal amount of the 7 3/4% Senior Notes due
2003 of FHC and (ii) the Company's financial results for the month of
April 1997.
No other Current Reports on Form 8-K were filed by the Company during such
quarter.
47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOUNDATION HEALTH SYSTEMS, INC.
(Registrant)
Date: August 13, 1997 /s/ Jay M. Gellert
-------------------------------------
Jay M. Gellert
President and Chief Operating Officer
Date: August 13, 1997 /s/ Jeffrey L. Elder
--------------------------------------
Jeffrey L. Elder, Senior Vice President
and Chief Financial Officer
48