<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NO. 1-10540
FOUNDATION HEALTH CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 68-0014772
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
3400 DATA DRIVE, RANCHO CORDOVA, CA 95670
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code:
(916) 631-5000
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock $.01 par value New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
NONE
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. (X)Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in part III of this Form
10-K or any amendment to this Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock on
October 24, 1996 as reported on the New York Stock Exchange Composite Tape
was approximately $ 1,794,779,393.
As of October 24, 1996, the Registrant had 58,956,074 shares of Common
Stock outstanding and entitled to vote in the election of directors.
<PAGE>
Part III (Items 10 through 13) are amended in their entirety in this Form
10-K/A, Amendment No. 1.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following is biographical information regarding the members of the
Board of Directors of Foundation Health Corporation (the "Company"):
Daniel D. Crowley, age 49, has been a director and the President and
Chief Executive Officer of the Company since May 1989. In May 1990, Mr.
Crowley was appointed Chairman of the Board of Directors of the Company.
David A. Boggs, age 53, has been General Manager of ATC/Vancom of Nevada
Limited Partnership, Operating Citizens Area Transit since April 1996. From
December 1991 through October 1995, Mr. Boggs was Regional Director of
Transit Operations of Laidlaw Transit, Inc. Mr. Boggs is a member of the
management and consumer advisory committee of Foundation Health, a California
Health Plan, the Company's California medical health maintenance organization
subsidiary. He has served as a director of the Company since 1990.
Jeffrey L. Elder, age 48, was appointed Senior Vice President -- Chief
Financial Officer of the Company in July 1991. Mr. Elder joined the Company
in July 1989 as Vice President -- Financial Operations and was appointed Vice
President -- Chief Financial Officer in March 1990. He has served as a
director of the Company since 1991.
Patrick Foley, age 64, has been Chairman, President and Chief Executive
Officer of DHL Airways, Inc. since 1988. Mr. Foley is also a director of
Continental Airlines and Glenborough Realty Trust. He has served as a
director of the Company since 1996.
Earl B. Fowler, age 71, is President and owner of Fowler International
Corporation, an international consulting firm, and Chairman of the Board of
SPD Technologies, Inc., an electrical equipment manufacturer. Prior thereto,
Mr. Fowler served in the United States Navy and retired as Vice Admiral, U.S.
Navy, and Commander of the Naval Sea Systems Command. He has served as a
director of the Company since 1988.
Richard W. Hanselman, age 68, has been a corporate director of and
consultant to various companies since 1986. Mr. Hanselman is also a director
of Arvin Industries, Becton, Dickinson and Company, BEC Group, Inc., the
Bradford Funds, Gryphon Holdings Inc. and IMCO Recycling, Inc. He has served
as a director of the Company since 1990.
Ross D. Henderson, M.D., age 50, was appointed Medical Director of
Intergroup Prepaid Health Services of Arizona, Inc., the Company's Arizona
HMO subsidiary, in May 1995 and has been a practicing physician with
Thomas-Davis Medical Centers, P.C. ("TDMC") since 1975 and the Medical
Director of TDMC since 1981. Dr. Henderson was a member of the Board of
Directors of Intergroup Healthcare Corporation or its predecessors from 1989
until its merger with the Company in November 1994. He has served as a
director of the Company since 1994.
Richard J. Stegemeier, age 68, is Chairman Emeritus of the Board of
Directors of Unocal Corporation and served as Chairman and Chief Executive
Officer of Unocal Corporation from July 1988 until his retirement in May
1994. Mr. Stegemeier is also a director of Wells Fargo Bank, Halliburton
Company, Northrop Grumman Corporation, Outboard Marine Corporation and
Pacific Enterprises. He has served as a director of the Company since 1993.
Steven D. Tough, age 45, has been employed by the Company and its
subsidiaries in various capacities since 1978. In October 1994, Mr. Tough was
appointed President and Chief Operating Officer -- Government Programs. Mr.
Tough has been a director of the Company since 1988.
2
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Raymond S. Troubh, age 70, is a financial consultant in New York City.
Mr. Troubh is also a director of ADT Limited, America West Airlines, Inc.,
Applied Power, Inc., ARIAD Pharmaceuticals, Inc., Becton, Dickinson and
Company, Diamond Offshore Drilling, Inc., General American Investors Company,
Olsten Corporation, Petrie Stores Corporation, Time Warner Inc., Triarc
Companies, Inc. and WHX Corporation. He has served as a director of the
Company since 1991.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company met six times during the fiscal
year ended June 30, 1996.
The Audit Committee of the Board of Directors, consisting of independent
directors Earl B. Fowler, Chairman, David A. Boggs and Richard J. Stegemeier,
met four times during the last fiscal year. The Audit Committee's functions
are to recommend, subject to approval by the Board of Directors and the
stockholders, the Company's independent auditors and to review the scope and
results of audits by the independent auditors and the work performed by the
Company's internal audit department.
The Compensation and Organizational Committee of the Board of Directors,
consisting of independent directors Richard W. Hanselman, Chairman, David A.
Boggs and former director Frank A. Olson, met seven times during the last
fiscal year. The Compensation and Organizational Committee's functions are to
develop and monitor compensation arrangements in accordance with the policies
of the Board of Directors. In performing these functions, the Compensation
and Organizational Committee administers and makes awards, interpretations
and other decisions under the Company's employee benefit and compensation
plans, including the Company's stock option plans.
The Report of the Compensation and Organizational Committee of the Board
of Directors on Executive Compensation is set forth in Item 11.
The Committee on Directors, consisting of independent directors Richard
J. Stegemeier, Chairman, Richard W. Hanselman and employee director Daniel D.
Crowley, met twice during the last fiscal year. The Committee on Directors'
functions are to make recommendations to the Board regarding the size and
composition of the Board of Directors and the criteria for election and
re-election of members of the Board of Directors, as well as providing
candidates for consideration by the Board to fill any vacancies that occur.
The Committee on Directors will consider nominees recommended by the
stockholders of the Company. Such nominations must generally be received by
the Company not less than 120 days prior to the meeting of stockholders at
which directors are to be elected. However, if less than 120 days notice is
given of the Annual Meeting, such nominations may be made no later than the
seventh day after the day notice of the Annual Meeting was mailed. Notice of
such nominees must contain information disclosed of nominees in proxy
solicitations regulated by Regulation 14A of the Securities Exchange Act of
1934 (the "Exchange Act").
The Investment Policy Committee of the Board of Directors, consisting of
independent directors Raymond S. Troubh, Chairman, Richard W. Hanselman and
former director Frank A. Olson and employee directors Daniel D. Crowley and
Jeffrey L. Elder, met three times during the last fiscal year. The Investment
Policy Committee's functions are to review the Company's investment policies
and guidelines, monitor performance of the Company's investment portfolio,
review the Company's financial structure and operations in light of the
Company's long-term objectives and review and recommend to the Board of
Directors appropriate action on proposed acquisitions and divestitures.
During the last fiscal year, each Board member attended at least 75% of
the aggregate of all meetings of the Board and the committees, if any, upon
which such director served and which were held during the period of time that
such person served on the Board or on such committee.
3
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DIRECTORS' COMPENSATION
Employee directors receive no additional compensation for service on the
Board of Directors or its committees. Non-employee directors of the Company
receive an annual retainer fee of $30,000 ($25,000 prior to July 1, 1996)
plus $1,500 for each quarterly Board meeting attended, $1,000 for each
special Board meeting or committee meeting attended, and $500 for
participation in each telephonic Board or committee meeting. The Investment
Policy Committee and the Compensation and Organizational Committee chairmen
each receive an annual fee of $10,000, the Audit Committee chairman receives
an annual fee of $5,000 and other committee chairmen receive annual fees of
$3,000. Directors may elect to defer all or a part of their compensation
under the Company's Deferred Compensation Plan. Directors also have the right
to receive all of their fees or their annual retainer fees in the form of
shares of the Company's Common Stock issued under the Company's 1990 Stock
Option Plan (the "Option Plan"). The number of shares is determined by
dividing the amount of the fees payable by the market value of Common Stock
on the date when the fees are payable.
Under the terms of the Option Plan, upon joining the Board, each
non-employee director receives an option to purchase 25,000 shares of Common
Stock at an exercise price equal to 100% of the fair market value of the
stock on the date of grant, which option vests ratably over the next five
anniversary dates of the date of grant.
In 1994, the Company adopted a retirement plan for non-employee
directors. The Directors' Retirement Plan provides a retirement benefit to
any director who is not an employee of the Company and who is either a member
of the Board of Directors as of July 1, 1994 or who thereafter becomes a
member of the Board. The retirement program will pay a monthly benefit for
his or her life equal to (i) 1/12 times the director's final average earnings
(i.e., all of a director's average annual earnings from the Company,
excluding consulting fees and income arising from stock options, in the three
calendar years within the final 10 calendar years in which the director's
earnings were highest), (ii) times the director's vested percentage (which
increases from 50% for three years of service to 100% for 10 or more years of
service), (iii) times 70%. Directors who have less than three years of
service with the Company are not entitled to any benefits. The benefit will
commence following the later of the date a director attains age 60 or the
date he or she ceases to be a director.
COMPENSATION AND ORGANIZATIONAL COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation and Organizational Committee of the Board of Directors
is comprised of independent directors Richard W. Hanselman, Chairman, and
David A. Boggs and independent director Frank A. Olson served on this
committee until his resignation in September 1996. The Company's Compensation
and Organizational Committee does not include any present or former officers
or employees of the Company or any of its subsidiaries.
The information concerning the Company's executive officers required by
this Item is incorporated by reference to the section in Part I hereof
entitled "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
REPORT OF THE COMPENSATION AND ORGANIZATIONAL COMMITTEE OF THE BOARD OF
DIRECTORS ON EXECUTIVE COMPENSATION
COMPENSATION PHILOSOPHY
The Compensation and Organizational Committee of the Board of Directors
of the Company (the "Committee") currently consists of independent
directors (who are neither employees nor officers of the Company). The
Committee reviews the Company's executive compensation program and policies
each year, determines the compensation of the Chief Executive Officer ("CEO")
and reviews and approves the CEO's recommendations for the compensation of
the other senior executive officers of the Company.
4
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The Committee's philosophy regarding compensation of the Company's senior
management is to link rewards to financial and operational performance, to
encourage creation of stockholder value and to achieve the Company's
strategic goals and objectives. Through its executive compensation policies,
the Committee seeks to attract, retain and motivate highly qualified
executives who will contribute to the Company's success. Thus, the Committee
believes the Company's compensation arrangements must remain competitive with
those offered by other companies of similar size and scope of operations,
including other large, publicly-held managed care organizations. To achieve
these goals, the executive compensation program consists of three primary
components which, taken together, constitute a flexible and balanced method
of establishing total compensation for senior management. These components
are base annual salary, short-term incentive awards under the Company's
Executive Incentive Plan (the "Incentive Plan") and long-term incentive
opportunity in the form of stock option grants. The Company also provides a
Supplemental Executive Retirement Plan, Executive Retiree Medical Benefits
Plan and split-dollar life insurance program as well as enhanced long-term
disability benefits for selected senior executive officers. The Committee
believes that the availability of comprehensive benefits is important to its
goal of retaining high-quality leadership and motivating executive
performance consistent with stockholder interests. Accordingly, the Company
makes available to its senior executive officers a broad range of benefit
programs, which are also available to employees generally, including life and
disability insurance, a Profit Sharing and 401(k) Plan, an employee stock
purchase plan and other benefit programs. Along with other highly compensated
employees of the Company, executive officers are also eligible to participate
in the Company's Deferred Compensation Plan, a nonqualified compensation
deferral plan under which the Company matches a portion of the amount of
employee deferred compensation. Compensation paid to the Company's executive
officers is also determined in part by reference to employment agreements
between the Company and such officers. The employment agreements applicable
to the executive officers named in the Summary Compensation Table are
described elsewhere in Item 11.
The Committee recognizes that the industry in which the Company operates
is both highly competitive and undergoing significant change, including the
results and uncertainties of health care reform, consolidation of competitors
and pricing pressures. Senior management is focusing the Company on its core
competencies, including expansion of its HMO and managed care workers'
compensation programs outside the state of California, administration of the
delivery of health care services under three large CHAMPUS managed care
contracts, implementation of the award to the Company's California HMO of
four California Medicaid contracts and enhancement by acquisition and
internal growth of the Company's specialty services products. During fiscal
year 1996, consolidated revenue increased from $2.5 billion to $3.4 billion
while operating income increased from $78.5 million (or $203.4 million
without the restructuring charge of $124.8 million related to acquisitions)
to $240.6 million during the same period. The Company's managed care
workers' compensation business grew 35% to $485 million in gross revenues
generated from products sold in 20 states from $358 million in 5 states
during the year. In addition, the Company acquired and is in the process of
integrating the Managed Health Network, Inc. companies with its behavioral
health and employee assistance program subsidiaries. Commercial managed care
(HMO, PPO, Medicare and Medicaid) enrollment grew over 31% in fiscal year
1996 over the previous year while specialty services subsidiaries provided
services to over 17 million lives in fiscal year 1996 from 10.6 million lives
in fiscal year 1995. The Company also revised its strategy during fiscal
year 1996 of establishing proprietary affiliated independent practice
associations ("IPAs") and medical groups to serve the Company's members and
sold its affiliated IPAs in California, Arizona and Florida during fiscal
year 1996 and has a pending sale of the affiliated medical groups (Foundation
Health Medical Group, Inc. in California and Thomas-Davis Medical Centers,
P.C. in Arizona) which are expected to close in November 1996. The Committee
continues to review the Company's compensation programs as the Company's
strategic, competitive and performance requirements necessitate, including
the impact of strategic acquisitions and dispositions and other operations on
the financial performance component of the Company's incentive plans.
BASE SALARIES
Individual salaries are determined based on individual experience,
performance and responsibilities within the Company and relative
competitiveness within the managed care industry on an annual basis. The
Committee reviews these factors with the CEO and approves, with modifications
it deems appropriate, the salaries for the Company's senior executive
officers, subject to existing employment agreements described below. After
no increase in base compensation for fiscal year 1996, the annual base
compensation for the CEO was increased from $750,000 to $825,000 by the
5
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Committee effective in April 1996. For fiscal year 1997, the Committee
delayed increases in annual base compensation for senior executives, other
than the CEO, for three months to coincide with delayed base salary increases
for non-senior management employees which have been in place for two fifteen
(15) month periods.
SHORT-TERM INCENTIVE PROGRAM
The goal of the short-term incentive program is to place a substantial
portion of the CEO's and other senior executive officers' annual cash
compensation at risk to provide strong incentives for the achievement of
specific earnings per share targets and other individual and organizational
goals which are crucial to the future of the Company and to the enhancement
of stockholder value. Under the Incentive Plan, prior to the commencement of
each fiscal year, corporate and individual performance goals for purposes of
determining annual incentive compensation are established for each member of
senior and middle management. These corporate and individual goals constitute
an integral part of the Company's annual business plan and budget. Specific
weighting is assigned for quantifiable financial, strategic and service goals.
Financial goals include meeting or exceeding specified earnings per share
targets and maintaining administrative expenses within budget. Strategic
goals include new product development, new business initiatives and
increasing market share in each of the Company's three primary lines of
business, i.e., commercial, managed care government contracts and specialty
services managed care. Service goals include quality and service improvement
and responsiveness to both customers and providers. These goals are tied to
specific objective criteria.
Under the Incentive Plan, senior executive officer participants are
eligible for an incentive award only if the Company's actual earnings per
share ("EPS") for the fiscal year equals or exceeds the EPS threshold
established under the Incentive Plan (which is based on increments of the
prior fiscal year's actual EPS). The CEO's incentive compensation is based
solely upon the Company meeting or exceeding its EPS targets. The incentive
compensation for the other senior executive officer participants is
determined by multiplying base salary by the individual's target incentive
percentage (which ranges from 50% to 70% of base salary) times the incentive
performance level achieved based on the financial, strategic and service
goals described above. As fiscal year 1996 actual EPS was more than 20%
greater than fiscal year 1995 EPS, the EPS component multiplier was 3. For
fiscal year 1996, senior executive officer participants (other than the CEO,
who achieved 100% of his incentive award) achieved an average of 87.94% of
their proposed incentive awards under the Incentive Plan. The Company's
independent accountants performed certain procedures and confirmed the
calculations of the incentive awards for the senior executive officers to be
in accordance with the terms of the Incentive Plan, which was approved by the
Company's stockholders in 1994.
LONG-TERM INCENTIVE
The Company's long-term incentive opportunity consists of the annual
grant of stock options pursuant to the Option Plan. The Committee believes
that through the use of stock options, senior management interests are
directly tied to enhancing stockholder value. Stock options are currently
granted at exercise prices at least equal to 100% of the fair market value of
the Company's common stock on the date of grant. Stock options generally have
terms of ten years and generally vest equally over a period of three or more
years. The stock options provide value to the recipients only when the price
of the Company's stock increases above the option grant price and the
employee remains in the employ of the Company until the option is
exercisable.
In April 1996, the Committee granted stock options to the named executive
officers, other than the CEO, as well as selected other key employees and
consultants. In determining the size of grant for the optionees, the
Committee reviewed the recommendations of the CEO, and assessed individual
performance, contributions to the business, prior years' grants, the number
of outstanding options held by each optionee and the relative levels of
responsibility within the Company.
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COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m)
Section 162(m) of the Internal Revenue Code of 1988, as amended, enacted
in 1993, generally disallows a tax deduction to publicly-held companies for
compensation exceeding $1 million paid to the corporation's chief executive
officer and four other most highly compensated executive officers. Qualifying
performance-based compensation will not be subject to the deduction limit if
certain requirements are met. The Company's Incentive Plan was approved by
the Company's stockholders in 1994. The Company believes that awards under
the Incentive Plan qualify for the corporate tax deduction. In addition, the
Company's Option Plan has been structured in a manner that appears to comply
with the statute's requirements and, as a result, performance-based
compensation associated with stock options is not expected to be subject to
the deduction limit. Accordingly, the Company does not expect this
deduction limitation to have a material effect on its operations or financial
condition. It is the Committee's intent to request stockholder approval of
future compensation plans for the executive officers subject to the deduction
limit as required by these regulations so the corporate tax deduction is
maximized without limiting the Committee's flexibility to attract and retain
qualified executives to manage the Company. However, the Company may from
time to time pay compensation to its executive officers that may not be
deductible.
The Committee believes that the programs described above provide base
salary payments and short and long-term incentive compensation structures that
effectively link executive and stockholder interests through equity-based plans
and are structured to provide incentives that are consistent with the long-term
goals of the Company.
The foregoing report has been furnished by the Compensation and
Organizational Committee of the Board of Directors of Foundation Health
Corporation:
Richard W. Hanselman, Chairman
David A. Boggs
SUMMARY COMPENSATION TABLE
The following table provides certain summary information relating to cash
and other forms of compensation paid to, or accrued by the Company on behalf of,
the Chief Executive Officer and the four other highest paid executive officers
for the fiscal year ended June 30, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------------------------------------------------------
Long Term
Other Annual Compensation All Other
Name Fiscal Year Salary(1) Bonus Compensation(2) Awards Options Compensation(3)
- --------------------- ----------- ---------- ---------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Daniel D. Crowley 1996 $762,500 $2,475,000 $77,017 None $534,506
1995 752,885 750,000 88,021 100,000 491,867
President and Chief Executive 1994 555,288 2,700,000 43,482 75,000 462,411
Officer
Steven D. Tough 1996 $300,000 $404,250 $32,127 30,000 $129,347
1995 250,962 210,000 30,467 30,000 122,985
President and Chief Operating 1994 241,022 328,125 21,580 25,000 50,426
Officer-Government Programs
Jeffrey L. Elder 1996 $300,000 $411,600 $45,432 30,000 $186,773
1995 215,832 210,000 30,335 30,000 159,110
Senior Vice President 1994 192,180 287,000 15,927 30,000 63,121
Chief Financial Officer
Kirk A. Benson 1996 $350,000 $483,875 $42,491 30,000 $209,817
1995 269,365 245,000 29,718 30,000 177,886
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President and Chief Operating 1994 190,123 287,000 8,283 30,000 63,193
Officer-Commercial Operations
Allen J. Marabito 1996 $250,000 $350,000 $37,080 30,000 $150,350
1995 205,788 175,000 15,998 30,000 145,636
Senior Vice President-General 1994 189,700 287,000 10,627 30,000 62,948
Counsel and Secretary
- ----------------------
</TABLE>
(1) Includes amounts deferred pursuant to the Company's Deferred Compensation
Plan and the Company's Profit Sharing and 401(k) Plan.
(2) Consists of amounts reimbursed for payment of taxes.
(3) Includes amount of Company matching contributions pursuant to the Deferred
Compensation Plan (pursuant to which the Company makes matching contributions of
up to 10% of a participating employee's compensation, including base salary and
bonus) and the 401(k) Plan (pursuant to which the Company makes matching
contributions of up to 6% of each participating employee's compensation). Also
includes amounts deemed to be compensation under the rules of the Securities and
Exchange Commission related to the present value of the premium payments made by
the Company for the benefit of the named executive officers under the Company's
split-dollar life insurance program. Such amounts in fiscal year 1996 amounted
to $70,873; $48,241; $46,187; $40,823; and $42,011 for Messrs. Crowley, Tough,
Elder, Benson and Marabito, respectively. Premiums and cost of funds paid by the
Company will be reimbursed to the Company on termination of the respective
policies, and any cash surrender value in excess of such premiums may be paid to
the executive's beneficiary.
STOCK OPTION GRANTS IN FISCAL YEAR 1996
The following table sets forth information relating to stock option grants
to each of the officers named in the Summary Compensation Table under the Option
Plan for the fiscal year ended June 30, 1996.
STOCK OPTION GRANTS IN FISCAL YEAR 1996
<TABLE>
<CAPTION> INDIVIDUAL GRANTS
% of Total
Option Potential Realizable value at
Number of Granted to Exercise Assumed Annual Rates of Stock
Options Employees in Price Expiration Price Appreciation for Option
Name Granted(1) 1996(2) ($ share) Date(3) Term(4)
- -------------------- ---------- ------- --------- ------- -----------------------------
5% 10%
------ ------
<S> <C> <C> <C> <C> <C>
Daniel D. Crowley None - - - - -
President and Chief Executive
Officer
Steven D. Tough 30,000 5.0% $40.25 4/05/06 $759,390 $1,924,444
President and Chief Operating
Officer-Government Programs
Jeffrey L. Elder 30,000 5.0% $40.25 4/05/06 $759,390 $1,924,444
Senior Vice President-
Chief Financial Officer
Kirk A. Benson 30,000 5.0% $40.25 4/05/06 $759,390 $1,924,444
President and Chief Operating
Officer-Commercial Operations
Allen J. Marabito 30,000 5.0% $40.25 4/05/06 $759,390 $1,924,444
Senior Vice President-General
Counsel and Secretary
</TABLE>
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____________________________
(1) All options granted in fiscal year 1996 expire 10 years following the
date of grant, subject to earlier termination upon certain events related to
termination of employment.
(2) Includes options to purchase 598,750 shares granted to the Company's
employees under the Option Plan.
(3) The options are exercisable as to 1/3 of the shares on each of April 5,
1997, 1998 and 1999.
(4) The dollar amounts in this table are the result of calculations at the 5
and 10 percent rates used to determine the potential realizable value of the
stock options in the above table and therefore are not intended to forecast
possible future appreciation, if any, of the Company's stock prices. No
assurances can be given that the stock prices will appreciate at these rates or
experience any appreciation at all.
AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1996 AND FISCAL YEAR END OPTION VALUES
With respect to each of the officers named in the Summary Compensation Table,
the following table contains information relating to the exercise of options
during fiscal year 1996.
AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1996 AND
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Shares
Acquired Number of Unexercised Value of Unexercised In-the-Money
on Options at June 30, 1996 Options at June 30, 1996 Exercisable/
Name Exercise Value Realized (1) Exercisable/Unexercisable Unexercisable (2)
- --------------------------- ---------- ------------------ -------------------------- --------------------------------------
<S> <C> <C> <C> <C>
Daniel D. Crowley 0 N/A 594,999/275,001 $4,096,587/$525,003
President and Chief Executive
Officer
Steven D. Tough 40,000 $1,112,680 89,166/58,334 $617,523/$95,000
President and Chief Operating
Officer-Government Programs
Jeffrey L. Elder 50,000 $1,291,978 80,000/60,000 $456,750/$95,000
Senior Vice President-
Chief Financial Officer
Kirk A. Benson 37,500 $1,018,231 102,500/60,000 $636,563/$95,000
President and Chief Operating
Officer-Commercial Operations
Allen J. Marabito 15,000 $357,745 87,500/60,000 $520,313/$95,000
Senior Vice President-General
Counsel and Secretary
</TABLE>
___________
(1) Calculated as market price per share at time of exercise less the per share
exercise price.
(2) Based on the closing price of the Common Stock on June 30, 1996 of $35.875
per share.
PENSION PLAN TABLE
The following table sets forth the annual retirement benefits payable under
the Company's Supplemental Executive Retirement Plan ("SERP") upon retirement at
or after age 60. A participant must have at least five years of service with the
Company to receive any retirement benefit, and must have 10 or more years of
service to obtain the full retirement benefit.
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PENSION PLAN TABLE
YEAR OF SERVICE (2)
--------------------------------------------------------
REMUNERATION (1) 15 20 25 30 35
- ---------------- -------- -------- -------- -------- --------
$200,000.00 $140,000 $140,000 $140,000 $140,000 $140,000
225,000.00 157,500 157,500 157,500 157,500 157,500
250,000.00 175,000 175,000 175,000 175,000 175,000
300,000.00 210,000 210,000 210,000 210,000 210,000
350,000.00 245,000 245,000 245,000 245,000 245,000
400,000.00 280,000 280,000 280,000 280,000 280,000
450,000.00 315,000 315,000 315,000 315,000 315,000
500,000.00 350,000 350,000 350,000 350,000 350,000
550,000.00 385,000 385,000 385,000 385,000 385,000
600,000.00 420,000 420,000 420,000 420,000 420,000
650,000.00 455,000 455,000 455,000 455,000 455,000
700,000.00 490,000 490,000 490,000 490,000 490,000
750,000.00 525,000 525,000 525,000 525,000 525,000
800,000.00 560,000 560,000 560,000 560,000 560,000
850,000.00 595,000 595,000 595,000 595,000 595,000
900,000.00 630,000 630,000 630,000 630,000 630,000
- --------------------------------------------------------------------------
___________
(1) Under the SERP, benefits are determined based on the executive's highest
annual base salary in the five calendar years prior to retirement. The benefits
are not subject to deduction for federal Social Security or other offset
amounts. As of the date hereof, the highest annual base salary and years of
service for each of the officers named in the Summary Compensation Table are:
Daniel D. Crowley, $825,000, eight years; Steven D. Tough, $350,000, eight
years; Jeffrey L. Elder, $350,000, eight years; Kirk A. Benson, $400,000, eight
years; and Allen J. Marabito, $265,000, six years.
(2) Under the SERP, a year of service is any calendar year after 1988 in which
the executive completes 1,000 hours of service.
PERFORMANCE TABLE
The following table compares the cumulative total stockholder return on the
Company's Common Stock with the cumulative total stockholder return of the
Standard & Poor's 500 stock index and the Standard & Poor's Health Care
Composite Index. The comparison assumes the investment of $100 on July 1, 1991
and that dividends were reinvested when paid. The comparisons in the table are
required by the Securities and Exchange Commission and are not intended to
forecast or be indicative of possible future performance of the Company's Common
Stock.
10
<PAGE>
Total Return to Stockholder
FISCAL YEAR
-------------------------------------------
1992 1993 1994 1995 1996
-------------------------------------------
Foundation Health Corporation $151.93 $151.93 $200.85 $139.70 $184.76
S&P 500 Index $113.41 $128.87 $130.68 $164.75 $207.59
S&P Health Care Composite Index $107.95 $94.82 $94.80 $137.69 $192.22
EMPLOYMENT AGREEMENTS
Each of the named executive officers has entered into an employment
agreement with the Company, which as amended, provides for a term of five
years commencing in April 1996, and which will be extended automatically for
one-year terms thereafter unless terminated by either party pursuant to the
terms of the agreement. The agreements provide that each officer is entitled
to base salary, participation in all employee benefit programs, reimbursement
for business expenses and participation in the Incentive Plan. Messrs.
Crowley, Tough, Elder, Benson and Marabito are currently entitled to receive
annual base salaries of $825,000, $350,000, $315,000, $400,000 and $265,000,
respectively.
The agreements also contain provisions that entitle each of the named
executive officers to receive severance benefits, which are payable if the
officer's employment with the Company is terminated for various reasons,
including death and termination following a "change of control" of the Company.
Under the employment agreements, a change in control would result (i) from a
change in the composition of the Board of Directors of the Company as a result
of which fewer than two-thirds of the incumbent directors are directors who
either had been directors of the Company 24 months prior to such change or were
elected to the Board with the affirmative vote of at least a majority of the
directors who had been directors of the Company 24 months prior to such change
or (ii) if any person becomes the beneficial owner of securities of the Company
representing 20% or more of the combined voting power of the Company's then
outstanding securities having the right to vote at elections of directors. In
the event that during the term of the employment agreement and within two years
after the occurrence of a change of control, one of the above officers
voluntarily resigns for "good
11
<PAGE>
reason" or is terminated by the Company for any reason other than "cause,"
disability or retirement, the employee shall be entitled to a severance
payment and certain severance benefits. The amount of the payment is equal to
2.99 times base salary then in effect and the average annual bonus paid to
the employee for the most recent three fiscal years. The severance benefits
are the acceleration of all unvested employee benefits, including outstanding
unvested options, and the provision of life, disability, health and accident
insurance for 36 months following termination. "Good reason" is defined as a
demotion, substantial reduction in authority or responsibility, reduction in
base compensation or adverse change in the formula regarding bonus
calculation or relocation of more than 100 miles. "Cause" means a willful act
by the employee which constitutes gross misconduct or fraud and which is
materially injurious to the Company or conviction of, or a plea of guilty or
no contest to, a felony. The contingent liability for severance payments that
the Company would be required to make under the employment agreements
(excluding amounts which may be payable under incentive plans and the value
of certain benefits) assuming termination as of August 31, 1996 after a
qualifying "change of control" would be $8,372,000, $1,836,234, $1,802,571,
$2,058,989, and $1,556,793, respectively, for Messrs, Crowley, Tough, Elder,
Benson and Marabito. In addition, the terms of the Rabbi Trust which was
established by the Company in connection with the SERP, the Directors'
Retirement Plan and the Executive Retiree Medical Plan, provide that upon a
change of control of the Company, the Company shall make an irrevocable
contribution to the trust in an amount sufficient to pay the participants and
beneficiaries benefits to which they are entitled under the plans at the date
of the change of control.
On October 2, 1996, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Health Systems International, Inc. ("HSI")
and a wholly owned subsidiary of HSI ( "Merger Sub"). Under the Merger
Agreement, the Company will be merged into Merger Sub, with the Company as the
surviving corporation and a wholly-owned subsidiary of HSI, and stockholders of
the Company will receive 1.3 shares of HSI Class A Common Stock for every share
of the Company's common stock held. In connection with the Merger Agreement,
Messrs. Crowley, Tough, Elder, Benson and Marabito entered into employment
agreements (and in the case of Messrs. Crowley, Tough and Benson, consulting and
non-compete agreements that would go into effect upon the termination of
employment) with HSI and the Company which would be effective if and only if the
Merger takes place. Upon the effective date of the Merger, these new employment
agreements would supersede the employment agreements described above.
The Merger is conditioned among other things, upon stockholder approval.
The new employment arrangements will be described fully in the Joint Proxy
Statement/Prospectus to be filed with the Securities and Exchange Commission and
distributed to the Company's stockholders in connection with solicitation of
their approval of the Merger.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information is furnished as to beneficial ownership of shares
of the Common Stock of the Company held by (i) each director, (ii) each of the
Company's officers named in the Summary Compensation Table, (iii) all directors
and named officers as a group, and (iv) each person or institution known to be
the beneficial owner of more than 5% of the Common Stock of the Company, as of
September 30, 1996.
12
<PAGE>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP
NAME AND ADDRESS OF BENEFICIAL OWNER (1)(2) PERCENT (1)(2)
- ------------------------------------ --------------------- --------------
Neuberger & Berman L.P. (3). 4,909,950 8.33
Harris Associates, L.P. (4) 4,002,250 6.79
Daniel D. Crowley (5)(6) 666,199 1.12
Steven D. Tough (5)(6) 89,166 *
Jeffrey L. Elder (5)(6) 80,000 *
Kirk A. Benson (5)(6) 107,500 *
Allen J. Marabito (5)(6) 87,500 *
David A. Boggs (7) 14,000 *
Patrick Foley (7) 0 *
Earl B. Fowler (7) 27,424 *
Richard W. Hanselman (7) 18,099 *
Ross D. Henderson, M.D. (5) 84,440 *
Richard J. Stegemeier (7) 15,000 *
Raymond S. Troubh (7) 30,349 *
All directors and named officers as a group
(12 persons) (6)(7) 1,219,677 2.03
______________
* Amount represents less than 1% of the Company's Common Stock.
(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares as of September 30, 1996 that such person
or group has the right to acquire within 60 days after such date.
(2) For purposes of computing the percentage of outstanding shares held by each
person or group of persons named above on a given date, shares which such person
or group has the right to acquire within 60 days after such date are deemed to
be outstanding, but are not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person.
(3) The Company has been advised by Neuberger & Berman L.P. as follows:
Neuberger & Berman L.P. is deemed to be a beneficial owner for purpose of Rule
13 (d) of the Exchange Act since it has shared power to make decisions whether
to retain or dispose of the securities of many unrelated clients. Neuberger &
Berman L.P. does not, however, have any economic interest in the securities of
those clients. The clients are the actual owners of the securities and have the
sole right to receive and the power to direct the receipt of dividends from or
proceeds from the sale of such securities. Partner(s) of Neuberger & Berman
L.P. own 29,300 shares. Partner(s) own these shares in their own personal
securities accounts. Neuberger & Berman L.P. disclaims beneficial ownership of
these shares since these shares were purchased with each partner(s)' personal
funds and each partner has exclusive dispositive and voting power over the
shares held in their respective accounts. With regard to 3,025,000 shares,
Neuberger & Berman L.P. and Neuberger & Berman Management Inc. are deemed to be
beneficial owners for purposes of Rule 13 (d) since they both have shared power
to make decisions whether to retain or dispose of the securities. Neuberger &
Berman L.P. and Neuberger & Berman Management Inc. serve as sub-adviser and
investment manager, respectively, of Neuberger & Berman's various Funds which
hold such shares in the ordinary course of their business and not with the
purpose nor with the effect of changing or influencing the control of the
issuer. No other Neuberger & Berman L.P. advisory client has an interest of
more than 5% of the Company.
(4) The Company has been advised by Harris Associates L.P. ("Harris") as
follows: Harris has been granted the power to vote shares in circumstances it
determines to be appropriate in connection with assisting its advised clients to
whom it renders financial advice in the ordinary course of its business, by
either providing information or advice to the persons having such power, or by
exercising the power to vote when it determines such action appropriate in
connection with matters which are submitted to a security holders' vote. In
addition, Harris serves as investment adviser to Harris Associates Investment
Trust (the "Trust") and various of Harris' officers and directors are also
officers and directors of
13
<PAGE>
the Trust. Harris does not consider that the Trust is controlled by such
persons. The series of the Trust designated The Oakmark Fund beneficially
owns 2,000,000 shares and are included as shares over which Harris has shared
voting and dispositive power and thus as shares beneficially owned by Harris,
because of Harris' power to mange the Trust's investments. In addition,
other Harris customers may own shares which are not included in the aggregate
number of shares reported herein because Harris is not deemed the beneficial
owner (as defined in Rule 13d-3) of such shares.
(5) The address for each of Messrs. Crowley, Tough, Elder, Benson and Marabito
and Dr. Henderson is c/o Foundation Health Corporation, 3400 Data Drive, Rancho
Cordova, CA 95670.
(6) Includes shares issuable upon exercise of options within 60 days of
September 30, 1996 as follows: Mr. Crowley, 594,999, Mr. Tough, 89,166, Mr.
Elder, 80,000, Mr. Benson, 102,500, Mr. Marabito, 87,500, and all executive
officers as a group (five persons), 954,165.
(7) Includes shares issuable upon exercise of options within 60 days of
September 30, 1996 as follows: Mr. Boggs, 14,000, Mr. Fowler, 17,099, Mr.
Hanselman, 17,099, Dr. Henderson, 1,500, Mr. Stegemeier, 15,000 and Mr. Troubh,
17,099.
SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive officers
and directors, and persons who own more than 10 percent of a registered class of
the Company's equity securities, to file reports of ownership on Forms 3, 4 and
5 with the Securities and Exchange Commission. Officers, directors and greater
than 10 percent stockholders are required by Securities and Exchange Commission
regulation to furnish the Company with copies of all Forms 3, 4 and 5 they file.
Based solely on the Company's review of the copies of such forms it has
received and written representations from certain reporting persons that they
were not required to file Forms 5 for specified fiscal years, the Company
believes that all of its officers, directors and greater than 10 percent
beneficial owners complied with all filing requirements applicable to them with
respect to transactions during fiscal year 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
NONE
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
FOUNDATION HEALTH CORPORATION
By /S/ DANIEL D. CROWLEY
-----------------------
Daniel D. Crowley
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Dated: October 24, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ DANIEL D. CROWLEY Director, President and Chief October 24, 1996
---------------------------- Executive Officer (Principal
Daniel D. Crowley Executive Officer) and Chairman
of the Board
/s/ DAVID A. BOGGS * Director October 24, 1996
----------------------------
David A. Boggs
/s/ JEFFREY L. ELDER Director, Senior Vice President- October 24, 1996
---------------------------- Chief Financial Officer (Principal
Jeffrey L. Elder Financial and Accounting Officer)
/s/ PATRICK FOLEY * Director October 24, 1996
----------------------------
Patrick Foley
/s/ EARL B. FOWLER * Director October 24, 1996
----------------------------
Earl B. Fowler
/s/ RICHARD W. HANSELMAN * Director October 24, 1996
----------------------------
Richard W. Hanselman
/s/ ROSS D. HENDERSON, M.D * Director October 24, 1996
----------------------------
Ross D. Henderson, M.D.
/s/ RICHARD J. STEGEMEIER * Director October 24, 1996
----------------------------
Richard J. Stegemeier
/s/ STEVEN D. TOUGH Director October 24, 1996
----------------------------
Steven D. Tough
/s/ RAYMOND S. TROUBH * Director October 24, 1996
----------------------------
Raymond S. Troubh
* By /s/ DANIEL D. CROWLEY October 24, 1996
- ------------------------------
Daniel D. Crowley
Attorney-In-Fact
</TABLE>
15
