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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 1-12718
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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
incorporation or organization) No.)
21600 OXNARD STREET, WOODLAND HILLS, CA 91367
(Address of principal executive offices) (Zip Codes)
(818) 676-6978
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 May 11, 1998, 111,761,431 shares of Class A Common Stock, $.001 par
value per share, were outstanding (exclusive of 3,194,374 shares held as
treasury stock) and 10,297,642 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--March 31, 1998 and December 31,
1997................................................................. 3
Condensed Consolidated Statements of Operations for the First Quarter
Ended March 31, 1998 and 1997........................................ 4
Condensed Consolidated Statements of Cash Flows for the First Quarter
Ended March 31, 1998 and 1997........................................ 5
Notes to Condensed Consolidated Financial Statements................... 6
Item 2--Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 9
Item 3--Quantitative and Qualitative Disclosures About Market Risk....... 16
PART II--OTHER INFORMATION
Item 1--Legal Proceedings................................................ 18
Item 2--Changes in Securities............................................ 20
Item 3--Defaults Upon Senior Securities.................................. 21
Item 4--Submission of Matters to a Vote of Security Holders.............. 21
Item 5--Other Information................................................ 21
Item 6--Exhibits and Reports on Form 8-K................................. 24
Signatures............................................................... 31
2
PART I--FINANCIAL INFORMATIONPART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOUNDATION HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
DECEMBER 31,
1997
MARCH 31, ------------
1998
------------
(UNAUDITED)
ASSETS
Cash and cash equivalents.......................................................... $ 343,940 $ 559,360
Securities available for sale...................................................... 603,498 553,001
Premiums receivable, net........................................................... 243,469 224,383
Amounts receivable under government contracts...................................... 269,043 272,060
Deferred taxes..................................................................... 205,930 213,695
Reinsurance and other receivables.................................................. 109,453 130,875
Other assets....................................................................... 236,863 223,900
Net assets of discontinued operations.............................................. 299,181 267,713
------------ ------------
Total current assets............................................................. 2,311,377 2,444,987
Securities held to maturity........................................................ 13,821 12,885
Property and equipment, net........................................................ 435,070 427,149
Goodwill and other intangible assets, net.......................................... 1,039,387 1,044,727
Other assets....................................................................... 147,231 146,602
------------ ------------
Total Assets..................................................................... $ 3,946,886 $4,076,350
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Reserves for claims and other settlements.......................................... $ 917,824 $ 967,815
Unearned premiums.................................................................. 132,700 244,340
Notes payable and capital leases................................................... 3,498 3,593
Amounts payable under government contracts......................................... 95,912 78,441
Accounts payable and other liabilities............................................. 392,505 470,483
------------ ------------
Total current liabilities........................................................ 1,542,439 1,764,672
Notes payable and capital leases................................................... 1,353,420 1,308,979
Other liabilities.................................................................. 123,625 106,725
------------ ------------
Total Liabilities................................................................ 3,019,484 3,180,376
Stockholders' Equity:
Common stock and additional paid-in capital........................................ 630,120 628,735
Retained earnings.................................................................. 396,632 370,394
Unrealized investment gains and (losses), net of taxes............................. (3,519) (7,324)
Common stock held in treasury, at cost............................................. (95,831) (95,831)
------------ ------------
Total stockholders' equity....................................................... 927,402 895,974
------------ ------------
Total Liabilities and Stockholders' Equity....................................... $ 3,946,886 $4,076,350
------------ ------------
------------ ------------
See Notes To Condensed Consolidated Financial Statements
3
FOUNDATION HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FIRST QUARTER ENDED
MARCH 31,
--------------------------
1998 1997
------------ ------------
Revenues
Health plan premiums................................................................ $ 1,844,484 $ 1,419,745
Government contracts................................................................ 213,627 246,034
Specialty services.................................................................. 91,113 78,030
Investment and other income......................................................... 26,150 26,210
------------ ------------
2,175,374 1,770,019
------------ ------------
Expenses
Health plan services................................................................ 1,584,503 1,181,008
Government health care services..................................................... 163,291 190,912
Specialty services.................................................................. 73,208 65,259
Selling, general and administrative................................................. 258,408 214,535
Amortization and depreciation....................................................... 30,841 24,684
Interest............................................................................ 21,861 14,938
------------ ------------
2,132,112 1,691,336
------------ ------------
Income from continuing operations before income taxes................................. 43,262 78,683
Income tax provision.................................................................. 17,024 31,059
------------ ------------
Income from continuing operations..................................................... 26,238 47,624
Income from discontinued operations................................................... -- 10,857
------------ ------------
Net income.......................................................................... $ 26,238 $ 58,481
------------ ------------
------------ ------------
Basic earnings per share
Continuing operations............................................................... $ 0.22 $ 0.38
Discontinued operations............................................................. -- 0.09
------------ ------------
Net................................................................................. $ 0.22 $ 0.47
------------ ------------
------------ ------------
Diluted earnings per share
Continuing operations $ 0.22 $ 0.38
Discontinued operations -- 0.09
------------ ------------
Net................................................................................. $ 0.22 $ 0.47
------------ ------------
------------ ------------
Weighted average common and common stock equivalent shares outstanding:
Basic............................................................................... 121,614 125,297
Diluted............................................................................. 121,907 125,706
See Notes To Condensed Consolidated Financial Statements
4
FOUNDATION HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
FIRST QUARTER ENDED
MARCH 31,
--------------------------
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................................... $ 26,238 $ 58,481
Adjustments to reconcile net income to net cash used for operating activities:
Amortization and depreciation..................................................... 30,841 24,684
Other changes in net assets of discontinued operations............................ (30,324) (8,123)
Other............................................................................. 939 203
Change in assets and liabilities
Premium receivable and unearned subscriber premiums............................... (130,726) (127,750)
Other assets...................................................................... 29,957 (32,363)
Amounts receivable/payable under government contracts............................. 20,488 (22,905)
Reserves for claims and other settlements......................................... (49,991) (9,454)
Accounts payable and accrued liabilities.......................................... (85,520) 10,021
------------ ------------
Net cash used for operating activities................................................ (188,098) (107,206)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale or maturity of securities available for sale................................... 118,609 116,510
Purchases of securities available for sale.......................................... (165,660) (146,458)
Maturity of securities held to maturity............................................. 1,500 1,550
Purchases of securities held to maturity............................................ (1,052) (2,264)
Purchases of property and equipment................................................. (26,450) (18,630)
Investment in other companies....................................................... -- (12,566)
Other............................................................................... -- (904)
------------ ------------
Net cash used for investing activities................................................ (73,053) (62,762)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases................ 1,385 5,599
Proceeds from issuance of notes payable and other financing arrangements............ 45,000 74,766
Repayment of debt and other non-current liabilities................................. (654) (706)
------------ ------------
Net cash provided by financing activities............................................. 45,731 79,659
------------ ------------
Net decrease in cash and cash equivalents............................................. (215,420) (90,309)
Cash and cash equivalents, beginning of period........................................ 559,360 487,938
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............................................. $ 343,940 $ 397,629
------------ ------------
------------ ------------
See Notes to Condensed Consolidated Financial Statements
5
FOUNDATION HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--MERGER
The current operations of Foundation Health Systems, Inc. (the "Company")
are a result of the April 1, 1997 merger transaction (the "FHS Combination")
involving Health Systems International, Inc. ("HSI") and Foundation Health
Corporation ("FHC"). Pursuant to the FHS Combination, 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 FHS
Combination, FHC stockholders received 1.3 shares of the Company's Class A
Common Stock for every share of FHC common stock held, resulting in the issuance
of approximately 76.7 million shares of the Company's Class A Common Stock to
FHC stockholders.
The FHS Combination 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, the Company's
condensed consolidated financial statements have been prepared and/or restated
as though HSI and FHC always had been combined.
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.
All adjustments presented in these condensed consolidated financial statements
are of a normal recurring nature. 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. For further information
please refer to the consolidated financial statements and notes thereto in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
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 AND GEM COSTS
Net restructuring costs of $149.4 million were recorded during the year
ended December 31, 1997 related to the FHS combination and the restructuring of
the Company's Eastern Division health plans. As of March 31, 1998, $40.9 million
of the net restructuring charge is expected to require future outlays of cash
and $68.4 million has been paid. In addition, $70.4 million of merger costs,
$118.6 million of other costs and $57.5 million of premium deficiency costs of
Gem Insurance Company were recorded during 1997.
NOTE 4--DISCONTINUED OPERATIONS
The Company revised its strategy of maintaining a presence in the workers'
compensation insurance business and thereby adopted a plan to discontinue this
segment of its business through divestiture of its
6
FOUNDATION HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4--DISCONTINUED OPERATIONS (CONTINUED)
workers' compensation insurance subsidiaries. As a result, the Company is
reporting its workers' compensation insurance segment as discontinued operations
for each period presented in the condensed consolidated financial statements.
Consistent with the foregoing, on May 5, 1998 the Company entered into a
definitive agreement to sell its workers' compensation insurance operations to
Superior National Insurance Group, Inc. The transaction is expected to yield the
Company approximately $290 million in cash net of tax considerations and the
cost of reinsurance.
The following sets forth the summarized balance sheet and results of
operations for the workers' compensation insurance companies to be sold as of
March 31, 1998 and December 31, 1997, and for the first quarters ended March 31,
1998 and 1997 (in thousands):
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
Total assets..................................................... $ 1,246,253 $1,260,335
Total liabilities................................................ 992,057 1,000,815
------------ ------------
Net assets....................................................... 254,196 259,520
Amounts to reconcile to net assets from discontinued operations:
Elimination of net notes payable to Parent and other net
receivables from Parent and subsidiaries..................... 139,804 107,193
Loss on disposition............................................ (94,819) (99,000)
------------ ------------
Net assets from discontinued operations.......................... $ 299,181 $ 267,713
------------ ------------
------------ ------------
FIRST QUARTER ENDED
MARCH 31,
----------------------
1998 1997
---------- ----------
Total revenues........................................................ $ 149,979 $ 132,225
Total expenses........................................................ 159,555 118,949
---------- ----------
Income (loss) before income taxes..................................... (9,576) 13,276
Provision (benefit) for income taxes.................................. (5,395) 2,419
---------- ----------
Net income (loss) from discontinued operations........................ (4,181) 10,857
Loss after measurement date anticipated in loss on disposition........ 4,181 --
---------- ----------
Net income (loss) from discontinued operations........................ $ -- $ 10,857
---------- ----------
---------- ----------
The loss on disposition of $99 million recorded at December 31, 1997
included the anticipated results of operations through the disposal date and
therefore the net loss of $4.2 million is not reflected on the Company's
condensed consolidated statement of operations for the quarter ended March 31,
1998.
NOTE 5--COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income." This standard requires that an enterprise report, by
major components and as a single total, the change in
7
FOUNDATION HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5--COMPREHENSIVE INCOME (CONTINUED)
its net assets during the period from non-owner sources which is defined as net
income plus direct adjustments to stockholders' equity such as unrealized
investment adjustments and pension liability adjustments. The Company's
comprehensive income for the first quarter ended March 31 pursuant to such
standard is as follows (in thousands):
1998 1997
--------- ----------
Net Income............................................................. $ 26,238 $ 58,481
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities not included in net income... 3,805 (15,737)
--------- ----------
Comprehensive Income................................................... $ 30,043 $ 42,744
--------- ----------
--------- ----------
NOTE 6--EARNINGS PER SHARE
Basic earnings per share excludes dilution and reflects income divided by
the weighted average shares of common stock outstanding during the periods
presented. Diluted earnings per share is based upon the weighted average shares
of common stock and dilutive common stock equivalents (stock options)
outstanding during the periods presented; no adjustment to income is required.
Common stock equivalents arising from dilutive stock options are computed using
the treasury stock method.
NOTE 7--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board issued SFAS 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; and SFAS No. 132 "Employers Disclosures About Pensions and
Other Postretirement Benefits", which revises and standardizes pension and other
benefit plan disclosures. Adoption of these statements will not impact the
Company's consolidated financial position, results of operations or cash flows.
These statements are effective for fiscal years beginning after December 15,
1997. Accordingly, the Company plans to adopt these statements during the fourth
quarter of 1998.
NOTE 8--PRIOR PERIOD RECLASSIFICATION
Certain prior period amounts have been reclassified to conform with the
current period presentation.
8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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, individual,
Medicaid and Medicare health maintenance organization ("HMO") and preferred
provider organization ("PPO") plans; government sponsored managed care plans;
and managed care products related to bill review, administration and
cost-containment, behavioral health, dental, vision and pharmaceutical products
and services.
CONSOLIDATED OPERATING RESULTS
REVENUES AND HEALTH CARE COSTS
The Company's revenues grew by $405.4 million or 22.9% for the quarter ended
March 31, 1998 as compared to the same period in 1997. Growth in revenues for
the quarter was due primarily to the acquisitions that occured in 1997,
including Physicians Health Services Inc. ("PHS"), FOHP, Inc. ("FOHP"), PACC
HMO, Inc. and PACC Health Plans, Inc. (collectively, "PACC") and the Advantage
Health plans ("Advantage Health"), as well as growth in the Company's existing
businesses. In particular, increase in premium rates in vitrually all markets
and growth in Medicaid enrollment in California contributed to the increase in
revenue. Specialty Services Division revenue increased by $13.1 million or 16.8%
for the quarter ended March 31, 1998 as compared to the same period in 1997
primarily due to increased revenue from the Company's behavioral health plans,
and bill review, cost containment and administrative services business. This
increase was partially offset by lower Government Contract Division revenue
which declined $32.4 million or 13.2% for the quarter ended March 31, 1998 as
compared to the same period in 1997, a result of contract risk share provisions
that reduce revenues when health care costs decline. Investment and other income
was $26.2 million for the quarter ended March 31, 1998, unchanged from the same
period in 1997.
The Health Plan medical care ratio ("MCR") (medical costs as a percentage of
revenue) for the quarter ended March 31, 1998 was 85.9% compared to 83.2% for
the quarter ended March 31, 1997. The increase in the MCR was primarily due to
higher pharmacy and Medicare benefit costs. This was partially offset by reduced
costs as a percent of revenue in the Government Contract Division and Specialty
Services Division.
SELLING, GENERAL, AND ADMINISTRATIVE COSTS
The Company's selling, general and administrative ("SG&A") expenses
increased by $43.9 million or 20.5% for the quarter ended March 31, 1998 as
compared to the same period in 1997. The increase in SG&A expenses is primarily
due to additional SG&A expenses associated with the acquisitions that occurred
in 1997. The administrative expense ratio (SG&A as a percentage of health plan
and government contracts revenue) decreased slightly to 12.6% for the quarter
ended March 31, 1998 from 12.9% for the same period in 1997.
AMORTIZATION AND DEPRECIATION
Amortization and depreciation expense increased by $6.2 million for the
quarter ended March 31, 1998 as compared to the same period in 1997. This was
primarily due to higher levels of intangible and fixed assets, a result of the
acquisitions of companies that occurred in 1997.
INTEREST EXPENSE
Interest expense increased by $6.9 million for the quarter ended March 31,
1998 as compared to the same period during the prior year. The increase in
interest expense was due to higher debt levels
9
associated with the Company's revolving lines of credit. The additional
borrowings were made for general corporate purposes as well as the purchase of
PHS, FOHP, PACC and Advantage Health during 1997.
INCOME TAX PROVISION
The tax provision rate on income from continuing operations for the quarter
ended March 31, 1998 of 39.4% declined slightly from the tax provision rate of
39.5% on income from continuing operations for the quarter ended March 31, 1997.
The tax provision rate differs from the statutory federal rate of 35% due to
state income taxes and tax-exempt income, offset by non deductable goodwill
amortization.
LINE OF BUSINESS REPORTING
The Company currently operates in the managed health care segment. The
managed health care segment's continuing operations are in three primary lines
of business (i) health plan operations; (ii) government contracts; and (iii)
specialty services. Discontinued operations include the worker's compensation
insurance segment.
CONTINUING OPERATIONS
HEALTH PLANS
Revenues generated by the Company's Health Plan operations increased $424.7
million or 29.9% for the quarter ended March 31, 1998 compared to the same
period in 1997 due to the acquisitions that occurred in 1997 including PHS,
FOHP, PACC and Advantage Health which contributed approximately $218.8 million,
$90.7 million, $35.6 million and $13.0 million, respectively, in revenue during
the first quarter of 1998. In addition, increases in commercial premium rates
and Medicaid enrollment growth in the California Division, commercial growth in
several states in the Company's Western Division, including Washington and
Colorado, and strong enrollment growth in Florida of 15% contributed to the
increase in Health Plan revenue.
The MCR for the Company's Health Plan operations increased to 85.9% for the
quarter ended March 31, 1998 as compared to 83.2% in the same period in 1997.
Higher Medicare benefit costs in a number of markets and pharmacy costs in
virtually all areas of the country accounted for the rise in the MCR. In
addition, reductions in reserve redundancy for shared risk and excess
reinsurance that occurred in the California Division during the first quarter of
1997 resulted in a lower MCR during that period.
GOVERNMENT CONTRACTS
Government Contract Division revenue decreased by $32.4 million or 13.2% for
the quarter ended March 31, 1998, compared to the same period in 1997. The
decline in revenue was primarily due to the risk sharing provision of CHAMPUS
contracts that reduce revenues when health care costs decline.
Government health care costs as a percentage of government contract revenue
decreased to 76.4% in the first quarter of 1998 from 77.6% in the first quarter
of 1997. This was primarily a result of improved health care delivery results on
the California/Hawaii CHAMPUS contract.
SPECIALTY SERVICES
Revenues generated by the Company's Specialty Services Division for the
first quarter of 1998 increased by $13.1 million or 16.8 % as compared to the
same period in 1997 primarily due to growth in service fees by the Company's
bill review cost containment and administrative services businesses, and
continued growth in its managed health network businesses.
Specialty Services Division costs decreased as a percentage of specialty
services revenue to 80.3% for the first quarter of 1998 as compared to 83.6% in
1997. The reduction in the MCR was due to reduced
10
administrative expenses as a percent of revenue in the bill review, cost
containment and administrative service business, partially offset by slightly
higher costs due to a change in product mix in the managed health network
businesses.
DISCONTINUED OPERATIONS
WORKERS' COMPENSATION INSURANCE BUSINESS
The Company revised its strategy of maintaining a presence in the workers'
compensation insurance business and thereby adopted a plan to discontinue this
segment of its business through divestiture of its workers' compensation
insurance subsidiaries. As a result, the Company is reporting its workers'
compensation insurance segment as discontinued operations. Consistent with the
foregoing, on May 5, 1998 the Company entered into a definitive agreement to
sell its workers' compensation insurance operations to Superior National
Insurance Group, Inc. The transaction is expected to yield the Company
approximately $290 million in cash net of tax considerations and the cost of
reinsurance.
REVENUE
Total workers' compensation revenue in the first quarter of 1998 increased
by $17.8 million to $150.0 million compared to the same quarter in 1997. Net
earned premium of $139.6 million in the first quarter of 1998 was $18.2 million
or 15% greater than the first quarter of 1997. The increase in premium is due
primarily to the effect of quota share and aggregate excess of loss reinsurance
in 1997. Ceded premium under the Aggregate Excess of Loss Treaty was $15 million
and ceded premium under the Quota Share Treaty was $8.0 million in the first
quarter of 1997. The decrease in ceded premium was offset by a $11.7 million
decline in written premiums, primarily as a result of reduced premium in the
California market, as the market continued to experience severe price
competition.
COSTS
Workers' compensation costs of $159.5 million, including general and
administrative costs, increased $40.6 million in the first quarter of 1998
compared to the same quarter in 1997. The increase is due primarily to increased
workers' compensation loss costs as a result of the elimination of the Aggregate
Excess of Loss Treaty effective January 1, 1998. In the first quarter of 1997,
$18.5 million of losses were ceded under this treaty. In addition, $10.1 million
of losses and commissions were ceded under the Quota Share Treaty in the first
quarter of 1997. Neither of these treaties were in effect during the first
quarter of 1998. Workers' compensation loss and loss adjustment expense costs
are $5.1 million greater than in the first quarter of 1997 and other
underwriting costs increased approximately $2 million in the first quarter of
1998 compared to the first quarter of 1997 due to the impact of the Quota Share
Reinsurance Treaty in the first quarter of 1997.
NET INCOME
The loss on dispositon of $99.0 million recorded at December 31, 1997
included the anticipated results of operations through the disposal date and
therefore, the net loss of $4.2 million is not reflected on the Company's
condensed consolidated statement of operations for the quarter ended March 31,
1998. This compares to net income of $10.8 million in the first quarter of 1997.
The following table presents financial information reflecting the Company's
continuing operations for its primary lines of business:
11
FOUNDATION HEALTH SYSTEMS, INC.
LINE OF BUSINESS FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FIRST QUARTER ENDED
FIRST QUARTER ENDED MARCH 31, 1998 MARCH 31, 1997
------------------------------------------- ------------------------------
PERCENT PERCENT PERCENT
AMOUNT OR OF TOTAL INCREASE AMOUNT OR OF TOTAL
PERCENT REVENUE (DECREASE) PERCENT REVENUE
------------ ----------- ---------------- ------------ ----------------
Revenues
Health plan premiums.................... $ 1,844,484 84.8% 29.9% $ 1,419,745 80.3%
Government contracts.................... 213,627 9.8 (13.2) 246,034 13.9
Specialty services...................... 91,113 4.2 16.8 78,030 4.4
Investment and other income............. 26,150 1.2 (0.2) 26,210 1.4
------------ ----- ------------ -----
2,175,374 100.0 22.9 1,770,019 100.0
------------ ----- ------------ -----
Expenses
Health plan services.................... 1,584,503 72.8 34.2 1,181,008 66.7
Government health care services......... 163,291 7.5 (14.5) 190,912 10.8
Specialty services...................... 73,208 3.4 12.2 65,259 3.7
Selling, general and administrative
(SG&A)................................ 258,408 11.9 20.5 214,535 12.1
Amortization and depreciation........... 30,841 1.4 24.9 24,684 1.4
Interest................................ 21,861 1.0 46.3 14,938 0.8
------------ ----- ------------ -----
2,132,112 98.0 26.1 1,691,336 95.5
------------ ----- ------------ -----
Income from continuing operations before
income taxes............................ 43,262 2.0 (45.0) 78,683 4.5
Income tax provision...................... 17,024 0.8 (45.2) 31,059 1.8
------------ ----- ------------ -----
Income from continuing operations......... $ 26,238 1.2% (44.9)% $ 47,624 2.7%
------------ ----- ------------ -----
------------ ----- ------------ -----
Basic earnings per share.................. $ 0.22 $ 0.38
Diluted earnings per share................ 0.22 0.38
Weighted average common and common stock
equivalent shares outstanding:
Basic................................. 121,614 125,297
Diluted............................... 121,907 125,706
Operating ratios:
Health plan medical care ratio........ 85.9% 83.2%
Government contracts medical care
ratio............................... 76.4 77.6
Specialty services medical care
ratio............................... 80.3 83.6
SG&A as a percent of health plan and
government contracts revenues....... 12.6 12.9
12
FOUNDATION HEALTH SYSTEMS, INC.
LINE OF BUSINESS FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
FIRST QUARTER ENDED
MARCH 31, 1998 FIRST QUARTER
-------------------------------- ENDED
PERCENT MARCH 31, 1997
INCREASE -----------------
ENROLLMENT (DECREASE) ENROLLMENT
------------- ----------------- -----------------
Health Plan
Commercial........................................................ 3,523 32.0% 2,669
Medicare risk..................................................... 310 25.5 247
Medicaid.......................................................... 492 65.1 298
----- ----- -----
4,325 34.6 3,214
Government..........................................................
CHAMPUS PPO and indemnity......................................... 882 (7.6) 955
CHAMPUS HMO....................................................... 720 25.4 574
----- ----- -----
1,602 4.8 1,529
ASO................................................................. 185 (17.4) 224
----- ----- -----
Combined.......................................................... 6,112 23.1 4,967
----- ----- -----
----- ----- -----
LIQUIDITY AND CAPITAL RESOURCES
Certain of the Company's subsidiaries must comply with minimum capital and
surplus requirements under applicable state laws and regulations, and must have
adequate reserves for claims. Certain subsidiaries must maintain ratios of
current assets to current liabilities 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,
lines of credit, and funds from planned divestitures of business are adequate to
fund existing obligations, introduce new products and services, and continue to
develop health care-related businesses. The Company regularly evaluates cash
requirements for current operations and commitments, and for capital
acquisitions and other strategic transactions. The Company may elect to raise
additional funds for these purposes, either through additional debt or equity,
the sale of investment securities or otherwise, as appropriate.
Government health care receivables and payables are best estimates of
payments that are ultimately collectible or payable. Since these amounts are
subject to government audit and negotiation, amounts ultimately collected may
vary from current estimates.
For the quarter ended March 31, 1998, cash used for operating activities was
$188.1 million compared to $107.2 million in the same quarter of 1997. This
decrease in the first quarter of 1998 was due primarily to the timing of receipt
of payments under federal Medicare contracts, a reduction of claims inventory in
the government contracts business, payments for merger, restructuring and other
costs associated with the FHS Combination, and restructuring charges associated
with the integration of businesses in New York, New Jersey and Connecticut. Net
cash used by investing activities was $73.1 million during the first quarter of
1998 as compared to $62.8 million during the same period in 1997. The increase
is due to a higher net redemption of securities available for sale and higher
capital spending. Net cash generated from financing
13
activities was $45.7 million in 1998 as compared to $79.7 million during the
same period in 1997. The net change during the first quarter of 1998 was due
primarily to additional draws under the revolving line of credit of $45 million
which were used to finance capital contributions to FOHP and PHS and to settle
an intercompany tax balance with the discontinued workers' compensation
operations in advance of receiving a tax refund.
The Company has a $1.5 billion credit facility (the "Credit Facility") with
Bank of America as Administrative Agent for the Lenders thereto, which was
amended by an Amendment dated April 6, 1998 with the Lenders (the "Amendment").
All previous revolving credit facilities were terminated and rolled into the
Credit Facility on July 8, 1997. At the election of the Company, and subject to
customary covenants, loans are initiated on a bid or committed basis and carry
interest at offshore or domestic rates, at the applicable LIBOR Rate plus margin
or the bank reference rate. Actual rates on borrowings under the Credit Facility
vary, based on competitive bids and the Company's unsecured credit rating at the
time of the borrowing. Under the Amendment, the Company's public issuer rating
becomes the exclusive means of setting the facility fee and borrowing rates
under the Credit Facility. In addition, certain covenants including financial
covenants were amended. The Credit Facility is available for five years, until
July 2002, but it may be extended under certain circumstances for two additional
years. As of May 11, 1998 $1.38 billion was outstanding under the Credit
Facility.
The Company's subsidiaries must comply with certain minimum capital
requirements under applicable state laws and regulations. The long-term portion
of principal and interest payments under the California Wellness Foundation
Notes issued by the Company in connection with the Health Net conversion is
subordinated to Health Net meeting tangible equity requirements under applicable
California statutes and regulations. As of March 31, 1998, the Company's
subsidiaries were in compliance with minimum capital requirements.
IMPACT OF INFLATION AND OTHER ELEMENTS
The managed health care industry is labor intensive and its profit margin is
low; hence, it is especially sensitive to inflation. Increases in medical
expenses or contracted medical rates without corresponding increases in premiums
could have a material adverse effect on the Company.
Various federal and state legislative initiatives regarding the health care
industry 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 results of operations of the Company.
The Company's ability to expand its business is dependent, in part, on
competitive premium pricing and its ability to secure cost-effective contracts
with providers. Achieving these objectives is becoming increasingly difficult
due to the competitive environment. In addition, the Company's profitability is
dependent, in part, on its ability to maintain effective control over health
care costs while providing members with quality care. Factors such as health
care reform, 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.
The Company's HMO and insurance subsidiaries are required to maintain
reserves to cover their estimated ultimate liability for expenses with respect
to reported and unreported claims incurred. These reserves are estimates of
future payments based on various assumptions. Establishment of appropriate
reserves is an inherently uncertain process, and there can be no certainty that
currently established reserves will prove adequate in light of subsequent actual
experience, which in the past has resulted and in the future could result in
loss reserves being too high or too low. The accuracy of these estimates may be
14
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.
Reference is also made to the disclosures contained under the heading
"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.
YEAR 2000
The Company recognizes that the arrival of the Year 2000 requires computer
systems to be able to recognize the date change from 1999 to 2000 and, like
other companies, is assessing and modifying its computer applications and
business processes to provide for their continued functionality.
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, prepare invoices or
engage in normal business activities.
The Year 2000 effort for the Company has the highest priority of technology
projects. The project has dedicated resources with multiple teams to address
unique systems environment. Uniform project management techniques are in place
with overall oversight responsibility residing with the Company's Chief
Technology Officer. Emphasis has been placed on business unit involvement and
the use of internal staff enhanced by external specialists. Selected systems
will be retired with the business functions being converted to Year 2000
compliant systems. A number of the Company's systems include packaged software
from large vendors that the Company is closely monitoring to ensure that these
systems are Year 2000 compliant. The Company believes that vendors will make
timely updates available to ensure that all remaining purchased software is Year
2000 compliant. The remaining systems' compliance with Year 2000 will be
addressed by internal technical staff.
The Company has initiated formal communications with others with whom it
does significant business to determine their Year 2000 issues. There can be no
assurances that the systems of other companies on which the Company's systems
rely will be timely converted, or that the failure to convert by another company
would not have a material adverse effect on the Company.
The Company does not anticipate that the related overall costs to resolve
these potential Year 2000 problems will be material to any single year. The
total current cost estimate for the Year 2000 project is between $13 and $17
million. These costs are expensed as incurred.
However, notwithstanding the foregoing, the costs of the project and the
timetable in which the Company plans to complete the Year 2000 compliance
requirements are based on estimates derived utilizing numerous assumptions of
future events including the continued availability of certain resources, third
party modification plans and other factors. There can therefore be no assurance
that these estimates will be achieved and actual results could differ materially
from these estimates.
At this time it is unclear as to the extent of existing insurance coverage,
if any, the Company may have to cover potential year 2000 liabilities. The
Company is currently analyzing the obtainment of such coverage.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CONTINUING OPERATIONS
The Company is exposed to interest rate and market risk primarily due to its
investing and borrowing activities. Market risk generally represents the risk of
loss that may result from the potential change in the value of a financial
instrument as a result of fluctuations in interest rates and in equity prices.
Interest rate risk is a consequence of maintaining fixed income investments. The
Company is exposed to interest rate risks arising from changes in the level or
volatility of interest rates, prepayment speeds and/or the shape and slope of
the yield curve. In addition, the Company is exposed to the risk of loss related
to changes in credit spreads. Credit spread risk arises from the potential that
changes in an issuer's credit rating or credit perception may affect the value
of financial instruments.
The Company has several bond portfolios to fund reserves. The Company
attempts to manage the interest rate risks related to its investment portfolios
by actively managing the asset/liability duration of its investment portfolios.
The overall goal of the investment portfolios is to support the ongoing
operations of the Company's business units. The Company's philosophy is to
actively manage assets to maximize total return over a multiple-year time
horizon, subject to appropriate levels of risk. Each business unit will have
additional requirements with respect to liquidity, current income and
contribution to surplus. The Company manages these risks by setting risk
tolerances, targeting asset-class allocations, diversifying among assets and
asset characteristics, and using performance measurement and reporting.
The Company uses a value-at-risk model to assess the market risk of its
investments. The estimation of potential losses that could arise from changes in
market conditions is typically accomplished through the use of statistical
models which seek to predict risk of loss based on historical price and
volatility patterns. The Company's measured value at risk for its investments
from continuing operations, using a 95% confidence level, was approximately $3.9
million at March 31, 1998.
The Company's calculated value-at-risk exposure represents an estimate of
reasonably possible net losses that could be recognized on its investment
portfolios assuming hypothetical movements in future market rates and are not
necessarily indicative of actual results which may occur. It does not represent
the maximum possible loss nor any expected loss that may occur, since actual
future gains and losses will differ from those estimated, based upon actual
fluctuations in market rates, operating exposures, and the timing thereof, and
changes in the Company's investment portfolios during the year.
The Company, however, believes that any loss incurred would be offset by the
effects of interest rate movements on the respective liabilities, since these
liabilities are affected by many of the same factors that affect asset
performance; that is, economic activity, inflation and interest rates, as well
as regional and industry factors.
In addition, the Company has some interest rate market risk due to its
borrowings. Notes payable, capital leases and other financing arrangements
totaled $1.35 billion at March 31, 1998 and the related average interest rate
was 6.08% (which interest rate is subject to change pursuant to the terms of the
Credit Facility). See a description of the Credit Facility under "Liquidity and
Capital Resources." The table below presents the expected cash flows of market
risk sensitive instruments at March 31, 1998. These cash flows include both
expected principal and interest payments consistent with the terms of the
outstanding debt as of March 31, 1998 (dollars in thousands).
1998 1999 2000 2001 2002 BEYOND TOTAL
--------- --------- ---------- --------- ------------ --------- ------------
Long-term Borrowings
Fixed Rate................. $ 4,329 $ 4,329 $ 24,288 $ 2,540 $ 2,715 $ 10,859 $ 49,060
Floating Rate.............. 78,600 78,600 78,600 78,600 1,388,600 0 1,703,000
--------- --------- ---------- --------- ------------ --------- ------------
Total........................ $ 82,929 $ 82,929 $ 102,888 $ 81,140 $ 1,391,315 $ 10,859 $ 1,752,060
--------- --------- ---------- --------- ------------ --------- ------------
--------- --------- ---------- --------- ------------ --------- ------------
16
DISCONTINUED OPERATIONS
The Company plans to sell its risk-assuming workers' compensation insurance
businesses which represent a separate segment of business. Therefore the results
of these businesses have been reported as discontinued operations.
The Company's measured value-at-risk of its investments from discontinued
operations at a 95 percent confidence level, at March 31, 1998 was approximately
$9.4 million.
The discontinued operations businesses do not have any significant interest
rate risk due to debt.
17
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" or the "FHS Combination") 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.
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 transition 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 (there currently exists one vacancy on the Board of
Directors which vacancy is in the process of being filled): 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's predecessor, HSI, filed a lawsuit against
Medaphis Corporation ("Medaphis") and its former Chairman and Chief Executive
Officer Randolph G. Brown, entitled 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 July
1996, HSI, the owner of 1,234,544 shares 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. HSI received as the
result of the acquisition 976,771 shares of Medaphis Common Stock in exchange
for its Series F Preferred Stock. Pursuant to the Merger Agreement, the Company
succeeded to the interests of HSI in the Medaphis lawsuit, and the Company has
been substituted for HSI as plaintiff in the suit.
In its complaint, the Company alleges that Medaphis was actually a poorly
run company with sagging earnings in its core business, 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 presenting materially false
financial statements and by failing to disclose that Medaphis would shortly
reveal a "write off" of up to $40 million 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 registration statement and the prospectus
provided by
18
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. The Company alleges that the defendants' actions
constitute violations of both federal and state securities laws, as well as
fraud and other torts under state law. The Company is seeking either rescission
of the transaction or damages in excess of $38 million. The defendants have
denied the allegations in the complaint, and the Company is vigorously pursuing
its claims against Medaphis.
Recently the Company moved to disqualify the law firm representing certain
of the individual defendants. The trial court granted the Company's motion, and
the law firm and its clients have appealed such decision. In addition, the trial
court granted a stay of the case until June 4, 1998 in order to permit the law
firm to appeal. The Company intends to press for an expedited appeal. Prior to
the stay the case was in the early stages of discovery. No trial date has yet
been set.
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. Thereafter, the plaintiffs filed a motion seeking to recover an additional
$4 million in attorneys' fees, and Gem filed post-trial motions for judgment
notwithstanding the verdict, for a new trial and for remittitur of the jury
verdict. Gem's motion for judgment notwithstanding the verdict was denied. The
court granted Gem's motion for remittitur and remitted the jury verdict to an
award of $1 million in compensatory damages and $2 million in punitive damages.
The court further ordered that if the plaintiffs did not accept the remittitur
order, Gem's motion for new trial would be granted. The plaintiffs accepted the
court's remittitur. The court also awarded plantiffs approximately $233,000 in
attorneys' fees and interest. Notwithstanding the plaintiffs' acceptance of the
court's remittitur, Gem plans to appeal the verdict.
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.
19
ITEM 2. CHANGES IN SECURITIES
REVOLVING CREDIT FACILITY
On July 8, 1997 the Company entered into a Credit Agreement with the banks
identified therein (the "Banks") and Bank of America National Trust and Savings
Association ("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 maturing on July 7, 2002. 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) 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 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 subject to certain specified limitations.
Under the Credit Agreement, as amended pursuant to a Letter Agreement dated
March 27, 1998 (the "Credit Facility Letter Agreement") and the First Amendment
and Waiver to Credit Agreement dated as of April 6, 1998 (the "Amendment and
Waiver") with the Banks, the Company is: (i) obligated to maintain certain
covenants keyed to the Company's financial condition and performance (including
a Total Leverage Ratio and Fixed Charge Ratio); (ii) obligated to limit liens;
(iii) subject to customary covenants, including (A) disposition of assets only
in the ordinary course and generally at fair value and (B) restrictions on
acquisitions, mergers, consolidations, loans, leases, joint ventures, contingent
obligations and certain transactions with affiliates; (iv) permitted to sell the
Company's workers' compensation insurance business, provided that the net
proceeds shall be applied towards repayment of the outstanding Loans under the
Credit Agreement; and (v) permitted to incur additional indebtedness in an
aggregate amount not to exceed $1,000,000,000 upon certain terms and conditions,
including mandatory prepayment of the outstanding Loans with a certain portion
of the proceeds from the issuance of such indebtedness, resulting in a permanent
reduction of the aggregate amount of commitments under the Credit Agreement by
the amount so prepaid. The Credit Facility Letter Agreement and the Amendment
and Waiver also provided for an increase in the interest and facility fees under
the Credit Agreement.
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 to
the outstanding Class A Common Stock
20
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").
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.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as Exhibit 99.1 to the Company's Registration Statement on
Form 8-A (File No. 001-12718). In connection with its execution of the Merger
Agreement for the FHS Combination, the Company entered into Amendment No. 1 (the
"Rights Amendment") to the Rights Agreement to exempt the Merger Agreement and
related transactions from triggering the Rights. In addition, the Rights
Amendment modifies certain terms of the Rights Agreement applicable to the
determination of certain "Adverse Persons," which modifications become effective
upon consummation of the transactions provided for under the Merger Agreement.
This summary description of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Rights Agreement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders of the
Company, either through the solicitation of proxies or otherwise, during the
quarter ended March 31, 1998.
ITEM 5. OTHER INFORMATION
CAUTIONARY STATEMENTS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company has previously filed with its Annual
Report on Form 10-K for the year ended December 31, 1997 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.
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.
21
RECENT DEVELOPMENTS
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 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. The CWF and the Company are also party to a
Registration Rights Agreement dated as of March 2, 1995 (the "CWF Registration
Rights Agreement") pursuant to which the CWF has the right to demand
registration for sale in underwritten public offerings of up to 8,026,298 shares
of Class B Common Stock.
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 as
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. The CWF currently holds 10,297,642 shares of Class B
Common Stock and, as of March 31, 1998, approximately $18.6 million in principal
of the CWF Notes remained outstanding.
On February 25, 1998, the CWF notified the Company of its intention to sell
up to 8,026,000 shares of Class B Common Stock pursuant to the CWF Registration
Rights Agreement in an underwritten public offering. Pursuant to the terms of
the CWF Registration Rights Agreement, the Company upon receipt of a
notification under such agreement must prepare and file a registration statement
with respect to such shares with the Securities and Exchange Commission as
expeditiously as possible but in no event later than 90 days following receipt
of the notice, subject to certain exceptions. The Company is responding to the
CWF notification in accordance with the terms of the CWF Registration Rights
Agreement. Any shares of Class B Common Stock sold by the CWF to third parties
will automatically convert on a one-for-one basis into shares of Class A Common
Stock.
SALE OF WORKERS' COMPENSATION BUSINESSES
The Company revised its strategy of maintaining a presence in the workers'
compensation insurance business as a result of various adverse developments
arising in 1997 in the workers' compensation insurance business, primarily
related to the workers' compensation claims environment in California. As
discussed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, such adverse developments resulted in the need for the
Company to strengthen its workers' compensation reserves at the end of 1997.
These developments also led the Company to adopt a plan to discontinue this
segment of its business, through divestiture of its workers' compensation
risk-assuming insurance subsidiaries.
In this connection, on May 5, 1998 the Company entered into a definitive
agreement (the "Workers' Compensation Sale Agreement") to sell its risk-assuming
workers' compensation insurance operations (the "Workers' Compensation
Operations") to Superior National Insurance Group, Inc. of Calabasas, Calif.
("Superior National"). The transaction, subject to customary closing conditions
including regulatory
22
approvals and a favorable vote from Superior National's shareholders, is
expected to close in the third quarter of 1998 and is expected to yield the
Company approximately $290 million in cash net of tax considerations and the
cost of reinsurance.
As required under the terms of the Workers' Compensation Sale Agreement, the
Company has obtained a commitment from a third party reinsurance company to
purchase reinsurance that will cover up to $150 million of adverse loss
development in the Workers' Compensation Operations for losses incurred through
December 31, 1997. At Superior National's option, the Company is obligated to
increase reinsurance coverage by $25 million in exchange for additional purchase
price consideration. A copy of the Workers' Compensation Sale Agreement is filed
as Exhibit 10.65 to this Quarterly Report on Form 10-Q.
In addition to the sale of the Workers' Compensation Operations, the Company
and Superior National have agreed to a contract under which the Company's
administrative services businesses that currently provide certain services to
the Workers' Compensation Operations would continue to provide such services and
additional services to Superior National for a period of five years after
closing. The Company estimates that, based on past results and the expected
contribution from Superior National's operations, this five-year service
agreement will create additional total revenue in the range of $40 to $50
million for the Company's administrative service subsidiaries over such
five-year term.
OTHER POTENTIAL DIVESTITURES
The Company is presently reviewing a possible plan to exit its HMO
operations in the states of Texas, Louisiana and Oklahoma due to inadequate
returns on invested capital. The Company is presently reviewing an exit strategy
for such states' businesses (including potential sale transactions). In December
1997 the Company also entered into a sale agreement to divest its
non-operational HMO license in Alabama to an unaffiliated third party.
The Company has decided to review the possibility of divesting its direct
ownership of two Southern California hospitals, a 128-bed hospital located in
Los Angeles, California, the East Los Angeles Doctors Hospital, and a 200-bed
hospital located in Gardena, California, the Memorial Hospital of Gardena.
Direct ownership of these two hospitals is not consistent with the Company's
business philosophy to manage health care through contracts with independent
providers of medical services. The Company is presently responding to inquiries
of parties which have expressed an interest in purchasing these hospitals.
The Company is also analyzing the strategic fit of its Denticare managed
dental operations with the ongoing operations and operating strategy of the
Company and, in this connection, whether a sale of such operations could be
completed consistent with the Company's interests.
As described in its Annual Report on Form 10-K for the year ended December
31, 1997, the Company continues to evaluate the profitability realized or likely
to be realized by its existing businesses and operations, and is reviewing from
a strategic standpoint which of such businesses or operations should be
divested.
23
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).
2.3 Amendment No. 1 to Agreement and Plan of Merger, dated October 20, 1997,
by and among the Company, PHS Acquisition Corp. and Physicians Health
Services, Inc. (filed as Exhibit 2.3 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997, which is
incorporated 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 (filed as Exhibit 3.2
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997, which is incorporated by reference herein).
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).
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).
24
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).
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).
25
10.17 Registration Rights Agreement dated as of March 2, 1995 between the
Company and The California Wellness 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).
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) (filed as Exhibit
10.23 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997, which is incorporated by reference herein).
10.24 Guarantee Agreement dated July 8, 1997 between the Company and First
Security Bank, National Association (filed as Exhibit 10.24 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997, which is incorporated by reference herein).
10.25 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).
10.26 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).
10.27 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).
26
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 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).
10.31 Consulting Agreement, dated as of May 1, 1997, between the Company, FHC
and Allen J. Marabito, (filed as Exhibit 10.35 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, which
is incorporated by reference herein).
10.32 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).
10.33 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).
10.34 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).
10.35 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).
10.36 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).
10.37 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).
10.38 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).
10.39 Foundation Health Systems, Inc. 1997 Stock Option Plan (filed as Exhibit
10.45 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997, which is incorporated by reference herein).
10.40 Foundation Health Systems, Inc. Third Amended and Restated Non-Employee
Director Stock Option Plan (filed as Exhibit 10.46 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, which
is incorporated by reference herein).
10.41 Foundation Health Systems, Inc. Employee Stock Purchase Plan (filed as
Exhibit 10.47 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, which is incorporated by reference herein).
27
10.42 Foundation Health Systems, Inc. Performance-Based Annual Bonus Plan (filed
as Exhibit 10.48 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, which is incorporated by reference herein).
10.43 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).
10.44 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).
10.45 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).
10.46 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).
10.47 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).
10.48 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).
10.49 $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).
10.50 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).
10.51 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).
28
10.52 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).
10.53 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).
10.54 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).
10.55 $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).
10.56 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).
10.57 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).
10.58 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).
10.59 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).
10.60 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).
10.61 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).
10.62 Amended Letter Agreement between the Company and Jay M. Gellert dated as
of August 22, 1997 (filed as Exhibit 10.69 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, which is
incorporated by reference herein).
29
10.63 Form of Credit Facility Commitment Letter, dated March 27, 1998, between
the Company and the Majority Banks (as defined therein) (filed as
Exhibit 10.70 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, which is incorporated by reference herein).
*10.64 First Amendment and Waiver to Credit Agreement, dated as of April 6, 1998,
among the Company, Bank of America National Trust and Savings
Association and the Banks (as defined therein), a copy of which is filed
herewith.
*10.65 Purchase Agreement by and between Foundation Health Corporation and
Superior National Insurance Group, Inc., dated as of May 5, 1998, a copy
of which is filed herewith.
10.66 Employment Letter Agreement between the Company and Dale Terrell dated
December 31, 1997 (filed as Exhibit 10.71 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997, which is incorporated
by reference herein).
10.67 Employment Letter Agreement between the Company and Steven P. Erwin dated
March 11, 1998 (filed as Exhibit 10.72 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, which is incorporated by
reference herein).
10.68 Employment Agreement, dated as of December 31, 1997, between the Company
and Maurice Costa (filed as Exhibit 10.73 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997, which is incorporated
by reference herein).
10.69 Employment Agreement, dated as of December 31, 1997, between the Company
and Robert L. Natt (filed as Exhibit 10.74 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, which is
incorporated by reference herein).
10.70 Employment Letter Agreement, dated October 10, 1997, between the Company
and Alex Labak (filed as Exhibit 10.75 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, which is incorporated by
reference herein).
10.71 Employment Letter, dated June 9, 1995, between Philip Katz, Ph.D. and
Health Net (filed as Exhibit 10.38 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995, which is incorporated by
reference herein).
*11.1 Statement relative to computation of per share earnings of the Company
(included in the notes to the Financial Statements contained in this
Quarterly Report on Form 10-Q).
21.1 Subsidiaries of the Company (filed as Exhibit 21.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, which is
incorporated by reference herein).
*27.1 Financial Data Schedule, a copy of which has been filed with the EDGAR
version of this filing.
- ------------------------
* A copy of the Exhibit is filed herewith.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed by the Company during the
quarterly period ended March 31, 1998.
30
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
FOUNDATION HEALTH SYSTEMS, INC.
(REGISTRANT)
Date: May 14, 1998 By: /s/ JAY M. GELLERT
-----------------------------------------
Jay M. Gellert
PRESIDENT AND CHIEF OPERATING OFFICER
Date: May 14, 1998 By: /s/ STEVEN P. ERWIN
-----------------------------------------
Steven P. Erwin
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
31