<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
FOUNDATION HEALTH SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
N/A
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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<PAGE>
<TABLE>
<C> <S>
April 1, 1998
[LOGO] Dear Stockholders:
It is a pleasure to invite you to
FOUNDATION attend the 1998 Annual Meeting of
HEALTH Stockholders of Foundation Health
SYSTEMS, Systems, Inc. to be held at The
INC. Brown Palace Hotel, 321 17th
NOTICE OF Street, Denver, Colorado 80202, on
1998 ANNUAL Thursday, May 7, 1998, at 10:00
MEETING a.m. (local time).
AND Each item of business described in
PROXY the accompanying Notice of Annual
STATEMENT Meeting and Proxy Statement will
be discussed during the meeting
and stockholders will have an
opportunity to ask questions. A
report on our business operations
will be presented at the meeting.
IT IS IMPORTANT THAT YOU VOTE YOUR
SHARES WHETHER OR NOT YOU PLAN TO
ATTEND THE MEETING. We urge you to
carefully review the Proxy
Statement and to vote your choices
on the enclosed card. Please sign,
date and return your proxy card in
the envelope provided as soon as
possible. If you do attend the
meeting, your proxy can be revoked
at your request in the event you
wish to vote in person.
I look forward to seeing you at
the meeting.
Sincerely,
[LOGO]
Malik M. Hasan, M.D.
CHAIRMAN OF THE BOARD OF
DIRECTORS
AND CHIEF EXECUTIVE OFFICER
</TABLE>
<PAGE>
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Foundation Health Systems, Inc. (the "Company") will hold its 1998 Annual
Meeting of Stockholders (the "Annual Meeting") on Thursday, May 7, 1998 at 10:00
a.m. (local time) at The Brown Palace Hotel, 321 17th Street, Denver, Colorado
80202, for the following purposes:
1. To elect three directors to serve until the 2001 Annual Meeting of
Stockholders.
2. To act upon any other matters that may properly come before the meeting.
The Board of Directors has fixed Monday, March 16, 1998 as the record date
for the determination of the stockholders entitled to notice of, and to vote at,
the Annual Meeting or any adjournment or postponement of the Annual Meeting.
At the Annual Meeting, each share of Class A Common Stock, par value $.001
per share, of the Company represented at the Annual Meeting will be entitled to
one vote on each matter properly brought before the Annual Meeting. The
California Wellness Foundation holds all of the Class B Common Stock, par value
$.001 per share, of the Company (which is non-voting) and has been invited to
send representatives to attend the Annual Meeting. Malik M. Hasan, M.D., Jay M.
Gellert and B. Curtis Westen have been appointed as proxy holders, with full
rights of substitution, for the holders of Class A Common Stock.
By Order of the Board of Directors,
/s/ B. CURTIS WESTEN, ESQ.
B. Curtis Westen, Esq.
SENIOR VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY
April 1, 1998
YOUR VOTE IS IMPORTANT
All stockholders are cordially invited to attend the Annual Meeting.
However, to ensure your representation at the Annual Meeting, please mark, sign,
date and return the enclosed proxy as soon as possible in the enclosed
self-addressed, postage-paid envelope. If you attend the Annual Meeting, you may
vote in person even if you have returned a proxy.
<PAGE>
[LOGO]
PROXY STATEMENT
GENERAL; VOTING OF SHARES
The accompanying proxy is solicited by the Board of Directors of Foundation
Health Systems, Inc. (the "Company") for use at the 1998 Annual Meeting of
Stockholders of the Company (the "Annual Meeting") to be held on Thursday, May
7, 1998 at 10:00 a.m. (local time) at The Brown Palace Hotel, 321 17th Street,
Denver, Colorado 80202, and at any adjournments or postponements thereof. This
Proxy Statement and accompanying proxy will be mailed beginning on or about
April 1, 1998 to give holders of Class A Common Stock, par value $.001 per share
("Class A Common Stock"), of the Company of record on March 16, 1998 (the
"Record Date") an opportunity to vote at the Annual Meeting. The Foundation
Health Systems, Inc. Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 serves as the Annual Report to Stockholders in connection with
the Annual Meeting.
Each share of Class A Common Stock represented at the Annual Meeting is
entitled to one vote on each matter properly brought before the Annual Meeting.
The Company also has outstanding non-voting Class B Common Stock, par value
$.001 per share ("Class B Common Stock"), all of which is held by The California
Wellness Foundation (the "CWF"). The Company's Fifth Amended and Restated
By-Laws (the "By-Laws") require that the holders of a majority of the total
number of shares entitled to vote be present in person or by proxy in order for
the business of the Annual Meeting to be transacted.
In voting, please specify your choices by marking the appropriate spaces on
the enclosed proxy card, signing and dating the card and returning it in the
accompanying envelope. If no directions are given and the signed card is
returned, then the proxy holders will vote the shares for the election of all
listed nominees, and at their discretion on any other matters that may properly
come before the meeting. In situations where brokers are prohibited from
exercising discretionary authority for beneficial owners who have not returned
proxies to the brokers (so-called "broker non-votes"), the affected shares will
be counted for purposes of determining the presence or absence of a quorum for
the transaction of business at the Annual Meeting but will not be included in
the vote totals and, therefore, will have no effect on the outcome of the votes.
REVOCABILITY OF PROXIES
Any stockholder giving a proxy has the power to revoke it at any time before
the proxy is voted. Proxies may be revoked by filing with the Secretary of the
Company written notice of revocation bearing a later date than the proxy, by
duly executing a subsequently dated proxy relating to the same shares of Class A
Common Stock and delivering it to the Secretary of the Company or by attending
the Annual Meeting and voting in person. Attendance at the Annual Meeting will
not in and of itself constitute revocation of a proxy. Any subsequently dated
proxy or written notice revoking a proxy should be sent to the Secretary of
Foundation Health Systems, Inc. at its executive offices located at 21600 Oxnard
Street, Woodland Hills, California 91367 or at its offices located at 225 North
Main Street, Pueblo, Colorado 81003.
SHARES OUTSTANDING
Only holders of record of Class A Common Stock at the close of business on
the Record Date are entitled to vote at the Annual Meeting. As of the Record
Date, the Company had outstanding 111,308,582 shares of Class A Common Stock.
Each share of Class A Common Stock is entitled to one vote. As of the Record
Date, the Company also had outstanding 10,297,642 shares of Class B Common
Stock, all of which
3
<PAGE>
are held by the CWF and all of which are nonvoting. The CWF has been invited to
send representatives to the Annual Meeting.
SOLICITATION
The Company will bear the entire cost of the solicitation of proxies,
including preparation, assembly and mailing of this Proxy Statement, the proxy
and any additional materials furnished to stockholders. Proxies may be solicited
by directors, officers and a small number of regular employees of the Company
personally or by mail, telephone or telegraph, but such persons will not be
specially compensated for such service. Copies of solicitation material will be
furnished to brokerage houses, fiduciaries and custodians that hold shares of
Class A Common Stock of record for beneficial owners for forwarding to such
beneficial owners. The Company has not engaged any outside firm or entity to
assist in the solicitation of proxies. The Company may also reimburse persons
representing beneficial owners for their costs of forwarding the solicitation
material to such owners.
YOUR VOTE IS IMPORTANT. PLEASE RETURN YOUR MARKED PROXY CARD PROMPTLY SO
YOUR SHARES CAN BE REPRESENTED, EVEN IF YOU PLAN TO ATTEND THE ANNUAL MEETING IN
PERSON. HIGHLIGHTS OF THE ANNUAL MEETING AND THE VOTING RESULTS WILL BE INCLUDED
IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30,
1998.
INTRODUCTION
Foundation Health Systems, Inc. (the "Company" or "FHS") is the nation's
fourth-largest publicly traded managed health care company. Its mission is to
enhance quality of life for its customers by offering products distinguished by
their quality, service and affordability. The Company's health maintenance
organizations ("HMOs"), insured preferred provider organizations ("PPOs") and
government contracts subsidiaries provide health benefits to 6.2 million
individuals in 21 states through group, individual, Medicare risk, Medicaid and
CHAMPUS programs. The Company's subsidiaries also offer managed health care
products related to behavioral health, dental, vision and prescription drugs,
and offer managed health care product coordination for multi-region employers
and administrative services for medical groups and self-funded benefits
programs.
The Company's current operations are a result of the merger transaction (the
"FHS Combination") between the Company (then named Health Systems International,
Inc. ("HSI")) and Foundation Health Corporation ("FHC") which was consummated on
April 1, 1997.
NOMINATION AND ELECTION OF DIRECTORS
The Board of Directors of the Company currently consists of 10 persons,
divided into three classes with four directors designated in Class III and three
directors designated in each of Class I and Class II. At the Annual Meeting,
stockholders will elect three directors for Class II. A vacancy currently exists
in Class I which is in the process of being filled by the Company's Board of
Directors in accordance with the Company's Fifth Amended and Restated By-Laws
(the "By-Laws").
The Class II nominees are Roger F. Greaves, Richard W. Hanselman and Raymond
S. Troubh. Each Class II director will be elected for a three-year term and will
hold office until the 2001 Annual Meeting of Stockholders. In each case, the
elected director will continue in office until such director's successor is
elected and has been qualified, or until such director's earlier death,
resignation or removal.
The By-Laws require the affirmative vote of the holders of a majority of
Class A Common Stock represented at the Annual Meeting and entitled to vote to
elect each named nominee. Stockholders eligible to vote at the Annual Meeting do
not have cumulative voting rights with respect to the election of directors.
Shares represented by proxies marked "withhold authority" for one or more
nominees will be counted as a negative vote.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR EACH NAMED NOMINEE.
4
<PAGE>
NOMINEES AND CONTINUING DIRECTORS
The Company's Fourth Amended and Restated Certificate of Incorporation (the
"Certificate") provides that the Board of Directors will consist of not less
than three nor more than twenty members, the exact number to be determined in
accordance with the By-Laws. The By-Laws provide that from April 1, 1997 until
April 1, 2002, the Board of Directors will consist of 11 members, six of whom
initially were selected by FHC (Messrs. Crowley (who subsequently resigned as a
director), Foley, Fowler, Hanselman, Stegemeier and Troubh, collectively the
"FHC Designees") and five of whom initially where selected by HSI (Dr. Hasan and
Messrs. Bouchard, Deukmejian, Farley and Greaves, collectively, the "HSI
Designees"); provided that if at any time during the period beginning on April
1, 1997 and up to, but not including, the election of directors at the May 2000
Annual Meeting of Stockholders (the "Transition Period"), Dr. Hasan is not the
Chief Executive Officer of the Company and a member of the Board of Directors,
then prior to the next meeting of the Board of Directors following such
occurrence, the other HSI Designees will select another individual to replace
Dr. Hasan, and either (i) an FHC Designee will resign so that the Board of
Directors will consist of 10 directors, of whom five will be HSI Designees and
five will be FHC Designees, or (ii) the directors will take action to increase
the size of the Board of Directors to 12 and the HSI Designees will select a
director to fill the vacancy created by such increase in the size of the Board
of Directors. Following any date that the Board of Directors consists of 10 or
12 directors, as the case may be pursuant to the preceding sentence, the Board
of Directors will be entitled to increase the size of the Board of Directors by
one in order to fill the new directorship with the new Chief Executive Officer
of the Company.
The Certificate provides for the Board of Directors to be divided into three
classes, each class to serve for staggered three-year terms, with each class
consisting, as nearly as possible, of one-third of the directors. The By-Laws
further provide that the designees for the classes of the Board of Directors
expiring in 1997, 1998 and 1999 shall consist of: (i) for Class I, four members,
consisting of Mr. Crowley, Dr. Hasan (or their respective replacements, if
applicable), one independent director appointed from the HSI Designees and one
independent director appointed from the FHC Designees; (ii) for Class II, three
members, consisting of two independent directors appointed from the FHC
Designees and one independent director appointed from the HSI Designees; and
(iii) for Class III, four members, consisting of two independent directors
appointed from the HSI Designees and two independent directors appointed from
the FHC Designees. During the Transition Period, in the event of death,
resignation, removal or failure to stand for reelection of any of the directors
originally designated by FHC or HSI, the vacancy on the Board of Directors and
any committee will be filled with a replacement FHC Designee or HSI Designee, as
the case may be, selected by the remaining FHC Designees or HSI Designees,
respectively. The Board of Directors believes that a classified Board of
Directors with staggered terms will help to assure the continuity and stability
of the Board of Directors and the business strategies and policies of the
Company.
Mr. Crowley voluntarily resigned from the Company's Board of Directors
effective May 8, 1997. Accordingly, there currently exists a vacancy in Class I.
The Board of Directors is currently in the process of recruiting an appropriate
replacement director to fill this vacancy pursuant to and in accordance with the
Company's By-Laws.
5
<PAGE>
The nominees were designated for election, pursuant to the By-Laws, by the
Committee on Directors of the Board of Directors of the Company (the "Committee
on Directors"). Each of the nominees has consented to serve as a director if
elected. The following table sets forth certain information with respect to the
nominees as well as to those other directors in Class I and Class III whose
terms continue after the Annual Meeting:
NOMINEES
<TABLE>
<CAPTION>
TERM TO
NAME PRINCIPAL OCCUPATION OR EMPLOYMENT AGE EXPIRE
- ----------------------------- ------------------------------------------------------------------- --- -----------
<S> <C> <C> <C>
CLASS II
Roger F. Greaves Former Co-Chairman of the Board of Directors, Co-President and 60 2001
Co-Chief Executive Officer of the Company and Director of various
companies
Richard W. Hanselman Director and Consultant to various companies 70 2001
Raymond S. Troubh Financial Consultant to and Director of various companies 71 2001
</TABLE>
CONTINUING DIRECTORS
<TABLE>
<CAPTION>
TERM TO
NAME PRINCIPAL OCCUPATION OR EMPLOYMENT AGE EXPIRE
- ----------------------------- ------------------------------------------------------------------- --- -----------
<S> <C> <C> <C>
CLASS I
Malik M. Hasan, M.D. Chairman of the Board of Directors and Chief Executive Officer of 59 2000
the Company
Gov. George Deukmejian Partner of Sidley & Austin and former Governor of the State of 69 2000
California
Adm. Earl B. Fowler President and owner of Fowler International Corporation and 72 2000
Director of various companies
CLASS III
J. Thomas Bouchard Senior Vice President, Human Resources of International Business 57 1999
Machines Corporation
Thomas T. Farley Senior Partner of Petersen, Fonda, Farley, Mattoon, Crockenberg and 63 1999
Garcia, P.C.
Patrick Foley Chairman, President and Chief Executive Officer of DHL Airways, 66 1999
Inc.
Richard J. Stegemeier Chairman Emeritus of the Board of Directors of Unocal Corporation 69 1999
</TABLE>
INFORMATION CONCERNING MEMBERS OF THE BOARD OF DIRECTORS AND NOMINEES
DR. HASAN became Chairman of the Board of Directors and Chief Executive
Officer of the Company on May 7, 1997. From consummation of the FHS Combination
until May 7, 1997, Dr. Hasan served as Chief Executive Officer and President of
the Company. Prior to the FHS Combination, Dr. Hasan served as Chairman of the
Board of Directors and Chief Executive Officer of the Company, commencing in
March 1995. Dr. Hasan also assumed the position of President of the Company in
March 1995, an office he held until June 1996. In addition, Dr. Hasan served as
Treasurer of the Company from November 1996 until consummation of the FHS
Combination. Dr. Hasan was the Co-Chairman, Co-President and Co-Chief Executive
Officer of the Company from January 1994 until March 1995. Dr. Hasan has served
as Chairman of the Board of Directors of QualMed, Inc. (a predecessor to the
Company) ("QualMed") since its formation in 1985. Dr. Hasan assumed the
additional position of Chief Executive Officer of QualMed in
6
<PAGE>
June 1990. Effective March 1991, Dr. Hasan also became President of QualMed, an
office he held until February 1995. A board-certified neurologist in Pueblo,
Colorado since June 1975, Dr. Hasan maintained a limited practice until July
1992. From 1980 to 1984, Dr. Hasan was a director of the Colorado Medical
Society and Parkview Episcopal Medical Center. In 1989, he was appointed by the
Governor of Colorado to the Colorado Health Data Commission, on which he
continued to serve until 1993. Dr. Hasan served as a Clinical Assistant
Professor of Neurology at the University of Colorado from 1976 until 1990 and
has been a member of the London Royal College of Physicians since 1964.
MR. BOUCHARD became a director of the Company upon consummation of the FHS
Combination. Previously, he served as a director of HSI since January 1994, upon
consummation of the merger transaction involving Health Net and QualMed which
created HSI (the "HSI Combination"). Mr. Bouchard served as a director of
QualMed from May 1991 until February 1995. Since October 1994, Mr. Bouchard has
served as Senior Vice President, Human Resources of International Business
Machines Corporation. From June 1989 until October 1994, Mr. Bouchard served as
Senior Vice President & Chief Human Resources Officer of U.S. West, Inc., a
diversified global communications company, and prior to that time he was Senior
Vice President--Human Resources and Organization for United Technologies Corp.
Mr. Bouchard has served on the Board of Directors of the Labor Policy
Association since March 1991 and Nordstrom National Credit Bank since April
1991.
MR. DEUKMEJIAN became a director of the Company upon consummation of the FHS
Combination. Previously, he served as a director of HSI since January 1994, upon
consummation of the HSI Combination. Mr. Deukmejian served as a director of
QualMed from April 1992 until February 1995. Mr. Deukmejian has been a partner
in the law firm of Sidley & Austin, Los Angeles, California since February 1991.
Mr. Deukmejian served as Governor of the State of California for two terms, from
January 1983 to January 1991. Mr. Deukmejian also served the State of California
as Attorney General from 1979 to 1982, as a State Senator from 1967 to 1978 and
as a State Assemblyman from 1963 to 1966. Mr. Deukmejian has been a director of
Burlington Northern Santa Fe Pacific Corporation, a railroad company, since
September 1995, and was a director of one of its predecessors, Santa Fe Pacific
Corporation, from January 1991 until September 1995. Mr. Deukmejian is also a
director of Whittaker Corporation.
MR. FARLEY became a director of the Company upon consummation of the FHS
Combination. Previously, he served as a director of HSI since January 1994, upon
consummation of the HSI Combination. Mr. Farley served as a director of QualMed
from February 1991 until February 1995 and is a senior partner in the law firm
of Petersen, Fonda, Farley, Mattoon, Crockenberg and Garcia, P.C. of Pueblo,
Colorado. Mr. Farley was formerly President of the governing board of Colorado
State University, the University of Southern Colorado and Ft. Lewis College and
Chairman of the Colorado Wildlife Commission. He served as Minority Leader of
the Colorado House of Representatives from 1967 to 1975. Mr. Farley was a
director of the Public Service Company of Colorado, a public gas and electric
company, from 1983 through 1997 and has been a director/advisor of Norwest Banks
of Pueblo and Sunset since 1985. Mr. Farley has been a member of the Board of
Regents of Santa Clara University, a Jesuit institution, since 1987.
MR. FOLEY became a director of the Company in April 1997 upon consummation
of the FHS Combination. Mr. Foley served as a director of FHC from 1996 until
the FHS Combination. He has been Chairman, President and Chief Executive Officer
of DHL Airways, Inc. since 1988. Mr. Foley is also a director of Continental
Airlines, Inc., Glenborough Realty Trust, Inc., Del Monte Corporation and
Flextronics International.
MR. FOWLER became a director of the Company in April 1997 upon consummation
of the FHS Combination. Mr. Fowler served as a director of FHC from 1988 until
the FHS Combination. He is President and owner of Fowler International
Corporation, an international consulting firm, a director of N V Marketing
Group, a life insurance marketing company, and a director 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.
7
<PAGE>
MR. GREAVES served as Co-Chairman of the Board of Directors, Co-President
and Co-Chief Executive Officer of the Company from January 1994 (upon
consummation of the HSI Combination) until March 1995. Prior to January 1994,
Mr. Greaves served as Chairman of the Board of Directors, President and Chief
Executive Officer of H.N. Management Holdings, Inc. (a predecessor to the
Company) since its incorporation in June 1990. Mr. Greaves is the former
Chairman of the Board of Directors, President and Chief Executive Officer of
Health Net, a subsidiary of the Company. Prior to joining Health Net, Mr.
Greaves held various management roles at Blue Cross of Southern California,
including Vice President of Human Resources and Assistant to the President, and
held various management positions at Allstate Insurance Company from 1962 until
1968. Mr. Greaves is a founding member of (and continues to serve on) the Board
of Governors of California State University at Long Beach, and he is a member of
the board of directors of Quidel Corporation and Zymed Corporation.
MR. HANSELMAN became a director of the Company in April 1997 upon
consummation of the FHS Combination. Mr. Hanselman served as a director of FHC
from 1990 until the FHS Combination. He 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, the Bradford Funds and Gryphon
Holdings Inc.
MR. STEGEMEIER became a director of the Company in April 1997 upon
consummation of the FHS Combination. Mr. Stegemeier served as a director of FHC
from 1993 until the FHS Combination. He 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 and Pacific Enterprises.
MR. TROUBH became a director of the Company in April 1997 upon consummation
of the FHS Combination. Mr. Troubh served as a director of FHC from 1991 until
the FHS Combination. He is a financial consultant in New York City and former
Governor of the American Stock Exchange. Mr. Troubh served as a general partner
of Lazard Freres & Co., an investment banking firm. Mr. Troubh is also a
director of America West Airlines, Inc., ARIAD Pharmaceuticals, Inc., Becton,
Dickinson and Company, Diamond Offshore Drilling, Inc., General American
Investors Company, Olsten Corporation, Time Warner, Inc., Triarc Companies, Inc.
and WHX Corporation. He is also a Trustee of MicroCap Liquidating Trust and
Petrie Stores Liquidating Trust.
8
<PAGE>
EXECUTIVE OFFICERS
The following sets forth certain biographical information with respect to
the current executive officers of the Company and the executive officers of the
Company as of December 31, 1997. Please refer to the information contained under
the heading "Information Concerning Members of the Board of Directors and
Nominees" for biographical information of executive officers who are also
directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ---------------------------------------------------------------------------
<S> <C> <C>
Malik M. Hasan, M.D. 59 Chairman of the Board of Directors and Chief Executive Officer
Jay M. Gellert 44 President and Chief Operating Officer
Dale T. Berkbigler, M.D. 48 Executive Vice President of Medical Affairs and Chief Medical Officer
Steven P. Erwin 54 Executive Vice President and Chief Financial Officer
Jeffrey L. Elder 50 Former Senior Vice President and Chief Financial Office
B. Curtis Westen, Esq. 37 Senior Vice President, General Counsel and Secretary
Robert Natt 49 President of FHS Northeastern Division
Arthur M. Southam, M.D. 41 President of FHS California Division
Michael D. Pugh 44 President of FHS Western Division
Maurice Costa 50 President of FHS Workers' Compensation Division
Gary Velasquez 37 President of FHS Government Operations Division and Specialty Services
Division
Alexander Labak 35 Senior Vice President and Chief Marketing Officer
Philip Katz, Ph.D. 55 Senior Vice President and Chief Information Officer
Dale Terrell 57 Senior Vice President and Chief Technology Officer
</TABLE>
MR. GELLERT became President and Chief Operating Officer of the Company on
May 7, 1997. From consummation of the FHS Combination until May 7, 1997, Mr.
Gellert served as Executive Vice President and Chief Operating Officer of the
Company. Mr. Gellert served as a director and President and Chief Operating
Officer of the Company from June 1996 until consummation of the FHS Combination.
Mr. Gellert also holds the position of Chairman of the Board of Directors for
the Company's principal operating subsidiaries, Health Net and QualMed. Prior to
joining the Company, Mr. Gellert directed Shattuck Hammond Partners Inc.'s
strategic advisory engagements in the area of integrated delivery systems
development, managed care network formation and physician group practice
integration. Prior to joining Shattuck Hammond Partners, Mr. Gellert was an
independent consultant, and from 1988 to 1991, he served as President and Chief
Executive Officer of Bay Pacific Health Corporation. From 1985 to 1988 Mr.
Gellert was Senior Vice President and Chief Operating Officer for California
Healthcare System. Mr. Gellert has served on the Board of Directors of Paragon
Health Network, Inc. since November 1997.
DR. BERKBIGLER became Executive Vice President of Medical Affairs and Chief
Medical Officer of the Company upon consummation of the FHS Combination. Prior
to consummation of the FHS Combination, Dr. Berkbigler served as Executive Vice
President of Medical Affairs of HSI and as a director of HSI from January 1994
until consummation of the FHS Combination. Dr. Berkbigler has been a director of
QualMed since July 1987 and has served as the Executive Vice President of
Medical Affairs of QualMed since July 1989. Dr. Berkbigler became President of
QualMed in February 1995, an office he held until July 1996. He was appointed
Vice Chairman of the Board, Executive Vice President and Chief Medical Officer
of the Company in July 1996. Prior to 1986, Dr. Berkbigler served as the
President of San Luis Valley Physicians Service Corporation, and from August
1986 to March 1991 held the position of San Luis Valley HMO Medical Director. He
was promoted to QualMed Medical Director in April 1987, and assumed the title of
Vice President of Medical Affairs of QualMed in January 1988. He also served as
a member of the Board of Directors of St. Joseph Hospital, Del Norte, Colorado,
from September 1983
9
<PAGE>
through September 1989 and as its Chairman of the Board from October 1986
through September 1988. Dr. Berkbigler was a practicing internist in Del Norte,
Colorado from 1979 until 1991.
MR. ERWIN became Executive Vice President and Chief Financial Officer of the
Company on March 11, 1998. From 1994 to 1997, he served as Executive Vice
President and Chief Financial Officer for U.S. Bancorp, a major superregional
bank holding company based in Portland, Oregon. U.S. Bankcorp was acquired by
First Bank System in 1997. From 1987 to 1994, Mr. Erwin served as Treasurer for
Boston-based BayBanks, Inc. BayBanks was the major retail bank in Boston. Mr.
Erwin is also a member of the Board of Directors and Chairman of the Audit
Committee of Summit Design, Inc., a Beaverton, Oregon-based technology Company.
Summit is a leading supplier of software tools designed to solve the integrated
circuit engineering problems caused by increasing chip complexity.
MR. ELDER became Senior Vice President and Chief Financial Officer of the
Company upon consummation of the FHS Combination, an office he held until
December 31, 1997 on which date he resigned as an employee and officer of the
Company. Prior to the FHS Combination, Mr. Elder served as Senior Vice President
and Chief Financial Officer of FHC. Mr. Elder joined FHC in 1989, was promoted
to Chief Financial Officer in March 1990 and was named a Senior Vice President
for FHC in 1991. Prior to joining FHC, Mr. Elder was an officer with Medical
Life Insurance Company of Ohio, where he held the office of Vice President of
Administration and Chief Financial Officer.
MR. WESTEN became Senior Vice President, General Counsel and Secretary of
the Company upon consummation of the FHS Combination. Mr. Westen served as
Senior Vice President, General Counsel and Secretary of HSI since March 1995.
Mr. Westen also serves as a director of certain subsidiaries of the Company. Mr.
Westen has served as Senior Vice President, General Counsel and Secretary of
QualMed since February 1994, and served as Vice President of Administration of
QualMed from August 1993 until February 1994. Since February 1995, he has served
as a director of QualMed. Mr. Westen served as Assistant General Counsel and
Assistant Secretary of QualMed since joining QualMed in March 1992. From
September 1986 until March 1992, Mr. Westen was an attorney with the firm of
Lord, Bissell & Brook in Chicago, Illinois.
DR. SOUTHAM became President of FHS California Division upon consummation of
the FHS Combination. Prior to consummation of the FHS Combination, Dr. Southam
served as a Senior Vice President of HSI and as the President and Chief
Executive Officer of Health Net from July 1996. Prior to accepting this
position, Dr. Southam was President and Chief Executive Officer for CareAmerica
Health Plans. He currently serves as Chairman of the California Association of
HMOs, an organization representing 32 health plans throughout the State of
California. Dr. Southam earned his medical degree from the University of
California at Los Angeles School of Medicine and served his residency in
internal medicine at Cedars-Sinai Medical Center in Los Angeles.
MR. PUGH became President of FHS Western Division upon consummation of the
FHS Combination. Prior to the FHS Combination, Mr. Pugh served as a Senior Vice
President of the Company and as the President and Chief Executive Officer of
QualMed since July 1996. Mr. Pugh is responsible for all of the Company's
western operations outside the State of California, as well as the operations of
certain insurance subsidiaries. Prior to 1996, Mr. Pugh was President/CEO of
Columbia Hospital at Medical City Dallas in Dallas, Texas. From June 1984 to
July 1995 he was President/CEO of Parkview Health System of Pueblo, Colorado and
from September 1979 to June 1984 he was Administrator/CEO of United General
Hospital of Sedro Woolley, Washington.
MR. COSTA became President of FHS Workers' Compensation Division upon
consummation of the FHS Combination. Prior to the FHS Combination, Mr. Costa
served in this capacity for FHC's workers' compensation subsidiaries. Mr. Costa
was a founder of Business Insurance Corporation, and he played a significant
role in its acquisition of California Compensation Insurance Company (Cal Comp)
in 1988 and its ultimate sale to FHC in August of 1993.
MR. VELASQUEZ became President of FHS Government Operations Division upon
consummation of the FHS Combination, and President of FHS Specialty Services
Division in September of 1997. Prior to the
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FHS Combination, Mr. Velasquez served as President and Chief Operating Officer
of FHC's California HMO. Prior to this position, Mr. Velasquez served as
President and Chief Operating Officer of FHC's managed behavioral health care
organization and as President and COO of Specialty Services for FHC. Prior to
joining FHC, Mr. Velasquez served as Chief Financial Officer/General Manager of
Managed Health Network (now a FHS subsidiary). He also served as Vice President,
Controller of Equicor, Inc., a national employee benefits company.
DR. KATZ has served as Senior Vice President and Chief Information Officer
of FHS since February 1998. Previously, he served as Vice President and Chief
Information Officer of FHS and HSI from July 1996. Prior to joining HSI, Dr.
Katz was Vice President, Planning and Technology at Graduate Health System from
March 1990 until July 1996. Other past positions include President of Integrated
Technologies and Associate Vice President, Technology and Information Management
at Thomas Jefferson University.
MR. LABAK became Senior Vice President and Chief Marketing Officer of the
Company in December 1997. Previously, he served as Vice President of Marketing
for Johnson & Johnson (Canada) Ltd. and as Vice President of Marketing/North
America for the personal products division of Johnson & Johnson, Inc. from May
1994 to December 1997.
MR. TERRELL became Senior Vice President and Chief Technology Officer for
the Company in January 1998. Previously, he served as Executive Vice President
of Technology Services for Banc One Corp. ("Banc One") and President of
Information Services, a division of Banc One Services Corporation in Columbus,
Ohio. As President of Information Services, Mr. Terrell was responsible for the
$350 million technology budget for Banc One, a multi-state banking company and
the parent of Banc One Services. Prior to joining Banc One in 1992, Mr. Terrell
held information technology positions with Security Pacific Automation Company,
a wholly owned subsidiary of Security Pacific Corporation. He also held
information technology positions with University Computing Company in Dallas,
Texas and International Business Machines Corporation in Oak Park, Michigan.
MR. NATT became President of the Company's Northeastern Division in January
1998. Previously, he served as President and Co-Chief Executive Officer of
Physicians Health Services, Inc. ("PHS"), now a subsidiary of the Company, from
August 1996 until December 1997, when the Company acquired PHS. From 1985
through August 1996 Mr. Natt served as Chief Operating Officer of PHS.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following information relates to transactions during 1997 by HSI prior
to consummation of the FHS Combination and by the Company after consummation of
the FHS Combination with certain directors and executive officers of the Company
and/or HSI.
Daniel D. Crowley and the Company entered into an Employment Agreement (the
"Crowley Employment Agreement") and a Consulting Agreement (the "Crowley
Consulting Agreement") each effective as of April 1, 1996. The Company and Mr.
Crowley entered into an Employment Agreement Termination Agreement effective May
7, 1997 (the "Crowley Termination Agreement"), pursuant to which Mr. Crowley
resigned as Chairman of the Board of Directors and in settlement of all amounts
to be received by Mr. Crowley under the Crowley Employment Agreement. Pursuant
to the Crowley Termination Agreement, Mr. Crowley was paid $13,083,192, which
amount was paid as a cash lump sum and represented a restructuring of the timing
of payments of the consideration payable under the Crowley Employment Agreement
(and did not result in a change in the amount of such consideration).
Under the terms of the Crowley Termination Agreement, Mr. Crowley agreed to
resign as a director of the Company effective May 8, 1997. In addition, the
Company agreed to accelerate the payment of the first year consulting fee in
return for Mr. Crowley's agreement to provide significantly greater consulting
services during the first twelve months of the Crowley Consulting Period (as
defined below). Pursuant to the Crowley Consulting Agreement, Mr. Crowley will
serve the Company as a consultant for the three year period ending May 8, 2000
(the "Crowley Consulting Period").
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The Crowley Consulting Agreement provides that the Company will pay Mr.
Crowley a consulting fee of $6 million for the first 12 months of the Crowley
Consulting Period, $2 million for the second 12 months of the Crowley Consulting
Period and $1 million for the third 12 months of the Crowley Consulting Period.
The Company will also reimburse Mr. Crowley for reasonable business expenses and
Mr. Crowley will continue to receive certain fringe benefits. In addition, Mr.
Crowley has agreed to certain provisions that do not allow him to compete with
the Company during the Crowley Consulting Period.
Charles T. Braden, a former director of HSI and currently a director of a
subsidiary of the Company, is President of CBS Associates, Inc. The Company paid
CBS Associates, Inc. approximately $121,752 in 1997 for certain warehouse,
printing, purchasing and real estate services. Mr. Braden has also provided
consulting services to a Company subsidiary. Such subsidiary paid Mr. Braden
fees of $10,000 for such consulting services rendered in 1997.
Mr. Bouchard, a director of the Company, is Senior Vice President, Human
Resources of International Business Machines Corporation ("IBM"). During 1997,
the Company's Health Net subsidiary engaged IBM as a consultant with respect to
the management of certain provider information. During 1997, Health Net paid IBM
approximately $212,000 in consulting fees for such services.
Gov. Deukmejian, a director of the Company, is a partner in the law firm of
Sidley & Austin. The Company and certain of its subsidiaries paid Sidley &
Austin approximately $365,739 in fees for legal services rendered to the Company
and certain of its subsidiaries in 1997.
Michael Gallagher, a director of HSI prior to the FHS Combination, is a
general partner of Shamrock Investments (a financial advisory firm of which Mr.
Gallagher is a general partner). During 1996, the Company paid Shamrock
Investments approximately $900,000 in fees for financial advisory services in
connection with potential business transactions in 1997. No amounts were paid to
Shamrock Investments in 1997. Mr. Gallagher served as Chairman, President and
Chief Executive Officer of Health Net (a subsidiary of the Company) from May
1995 until May 1996, during which time the Company and Health Net had in place
an arrangement with Shamrock Investments pursuant to which Mr. Gallagher was
retained to serve in such capacity.
Douglas M. Mancino, a former director of HSI and currently a director of a
subsidiary of the Company, is a partner in the law firm of McDermott, Will &
Emery. The Company paid McDermott, Will & Emery approximately $720,651 in fees
for legal services rendered to the Company and certain of its subsidiaries in
1997.
Robert L. Montgomery, a former director of HSI and currently a director of a
subsidiary of the Company, is the Western Division President of Sutter Health, a
hospital provider system. Affiliates of Sutter Health have provided hospital and
other services to Company subsidiaries totaling approximately $67.1 million in
1997. In addition, Sutter Health affiliates were employer groups of Company
subsidiaries in 1997. Premiums paid by such Sutter Health affiliates to such
subsidiaries totaled approximately $1.2 million in 1997.
Mr. Farley, a director of the Company, is a partner in the law firm of
Petersen, Fonda, Farley, Mattoon, Crockenberg and Garcia, P.C., which was an
employer group of a Company subsidiary in 1997 and continues to be such an
employer group. Premiums paid by such firm to this subsidiary totaled
approximately $36,750 in 1997.
The Company entered into a termination agreement with Mr. Greaves, a
director of the Company, as of March 31, 1997 (the "Greaves Termination
Agreement"), which provided for the termination of the Company's consulting
agreement with Mr. Greaves, which was entered into as of March 31, 1995 (the
"Greaves Consulting Agreement"). The Greaves Termination Agreement provides that
Mr. Greaves will be subject to the provisions relating to non-competition and
Company confidential information, and the Company will be obligated to pay Mr.
Greaves a "gross-up payment" in respect of excise taxes imposed by Section 4999
of the Code, which may be assessed against payments received by Mr. Greaves
under the Consulting Agreement or any other Company plan in which he
participates. Mr. Greaves received a payment of approximately $1,744,000, which
amount constitutes full satisfaction of the Company's
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obligations under the Consulting Agreement and the value of certain retirement
benefits. In addition, the value of Mr. Greaves' accounts under the Company's
Executive Retirement Program were satisfied by the delivery to Mr. Greaves of
the insurance policy purchased by the Company for the purpose of providing such
benefits and payment to Mr. Greaves of its gross-up obligation associated
therewith (the value of such accounts and gross-up obligations were equal to
approximately $2,578,000). Under the terms of the Greaves Termination Agreement,
Mr. Greaves continued to have the use of facilities and secretarial and clerical
assistance at the Company's offices in Woodland Hills, California until December
31, 1997 and was entitled to purchase from the Company for an aggregate purchase
price of $1 certain items of equipment (including, but not limited to, certain
items of office furniture and computer equipment and an automobile). As a result
of such Greaves Termination Agreement, Mr. Greaves became qualified as an
"independent director" of the Company under the By-Laws.
Pursuant to the Amended California Wellness Foundation Shareholder
Agreement, dated as of January 28, 1992 (the "CWF Shareholder Agreement") by and
among the Company, The California Wellness Foundation (the "CWF") and certain
stockholders of H.N. Management Holdings, Inc., a predecessor to the Company
("HNMH"), named therein, the CWF is subject to various volume and manner of sale
restrictions specified in the CWF Shareholder Agreement which limit the number
of shares that the CWF may dispose of prior to December 31, 1998.
Under the relevant provisions of California law, when a corporation converts
from nonprofit to for-profit corporate status, the equivalent of the fair market
value of the nonprofit corporation must be contributed to a successor charity
that has a charitable purpose consistent with the purposes of the nonprofit
entity. The CWF was formed to be the charitable recipient of the conversion
settlement when Health Net (a subsidiary of the Company) effected a conversion
from nonprofit to for-profit status, which occurred in February 1992 (the
"Conversion"). In connection with the Conversion, Health Net issued to the CWF
promissory notes in the original principal amount of $225 million (the "CWF
Notes") and shares of Class B Common Stock (which immediately prior to the
business combination involving HNMH and QualMed, Inc. were split to become
25,684,152 shares of Class B Common Stock then held by the CWF). While such
shares are held by the CWF, they are entitled to the same economic benefit 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
into shares of Class A Common Stock. In addition, the CWF Shareholder Agreement,
in conjunction with the Letter Agreement executed by the Company and the
Trustees of the Trust (each as defined below) on March 9, 1995 and ratified by
the Company's Board of Directors on March 16, 1995 (the "Letter Agreement")
requires the CWF to offer its shares of Class B Common Stock to the Company
prior to selling such shares to any other person. In this respect, the CWF
Shareholder Agreement permits the CWF to offer and sell up to 80% of the CWF's
interest in the Class B Common Stock (or all but 5,136,830 of such shares) to
the Company prior to December 31, 1998. The CWF Shareholder Agreement, in
conjunction with the Letter Agreement, requires the CWF to provide the Company
with notice on or before January 31 of each year setting forth the number of
shares, if any, being offered to the Company. The Company then has 45 days
following receipt of such notice to notify the CWF of its intention to purchase
such number of shares pursuant to this right of first refusal.
On January 27, 1997, the CWF provided the Company with notice of its offer
to sell 3,852,653 shares of Class B Common Stock, provided that at the Company's
option, the number of shares could be increased to not more than 5,000,000
shares. Pursuant to such offer and subsequent letter agreements (collectively,
the "1997 Notice Materials") the CWF agreed to extend until June 20, 1997 the
time by which the Company could notify the CWF of its intention to purchase or
redeem such number of shares of Class B Common Stock. Accordingly, after
appropriate notice was given and effective June 27, 1997, the Company redeemed
4,550,000 shares of Class B Common Stock from the CWF at a price of $24.469 per
share.
In addition, on June 18, 1997, the Company provided its consent under the
CWF Shareholder Agreement to permit the CWF to sell 3,000,000 shares of Class B
Common Stock to an unrelated third party. Pursuant to the 1997 Notice Materials,
the CWF also retained the right to sell the balance of the 5,000,000 shares not
redeemed by the Company (or up to 450,000 shares) to unrelated third parties.
Sales
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of such 450,000 shares to unrelated third parties were consummated throughout
August of 1997. On November 6, 1997, the Company also provided its consent under
the CWF Shareholder Agreement to permit the CWF to sell 1,000,000 shares of
Class B Common Stock to an unrelated third party. Pursuant to the Company's
Certificate of Incorporation, such 3,000,000 shares, 450,000 shares and
1,000,000 shares of Class B Common Stock automatically converted into shares of
Class A Common Stock in the hands of such third parties.
On February 25, 1998, the CWF notified the Company of its intention to sell
up to 8,026,000 additional 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. As set forth above, any shares of Class B Common
Stock sold by CWF to third parties will automatically convert on a one-for-one
basis into shares of Class A Common Stock.
On March 9, 1995, the Company and Roger F. Greaves, Stephen D. Vogt and
Gerald M. Cooper (in their capacities as such, the "Trustees") as Trustees of
the trust (the "Trust") created pursuant to an Amended and Restated Trust
Agreement dated as of May 1, 1994 (the "Trust Agreement"), on behalf of the
founding stockholders of HNMH who were stockholders as of the conversion (the
"Conversion") of Health Net (a predecessor to the Company) from nonprofit to
for-profit corporate status (the "Original Stockholders"), executed a Letter
Agreement (the "Letter Agreement"), which agreement was ratified by the Board of
Directors of the Company on March 16, 1995. The following persons were directors
or executive officers of the Company and/or HSI in 1997 and are among the
Original Stockholders: Roger F. Greaves, Charles T. Braden and James Wilk.
Pursuant to the Letter Agreement, the Original Stockholders agreed to waive
their right to purchase shares of Class B Common Stock from the CWF pursuant to
the CWF Shareholder Agreement through the term of the CWF Shareholder Agreement.
The Letter Agreement provided that, during the 10-day period commencing
immediately after the 120-day period following Board approval of the Letter
Agreement, the Original Stockholders could have elected to sell to the Company a
number of shares of Class A Common Stock up to the entire number of shares of
Class A Common Stock owned by such stockholder under the Trust at a purchase
price equal to the average closing price of Class A Common Stock on the NYSE
over the last 20 trading days occurring in the 120-day period. However, the
Company currently has no such obligation to repurchase shares from the Original
Stockholders pursuant to the terms of the Letter Agreement because, prior to the
end of the 120-day period, the Board of Directors of the Company approved a
proposed business combination (the "HSI/WellPoint Transaction") with WellPoint
Health Networks Inc. ("WellPoint") and certain commercial operations of Blue
Cross of California ("BCC"). Nevertheless, the Letter Agreement also provided
that, because the proposed HSI/WellPoint Transaction was not ultimately
consummated, the Company and the Original Stockholders were to commence good
faith discussions to determine a procedure, consistent with the terms and
conditions of the Letter Agreement, whereby each such Original Stockholder could
elect to sell to the Company a number of shares of Class A Common Stock up to
the entire number of such shares beneficially owned by such Original Stockholder
under the Trust. In accordance with such good faith discussions, in February
1996 the Company repurchased an aggregate of 303,879 shares of Class A Common
Stock at a price of $31.547 per share (or $9,586,470 in the aggregate) from the
Original Stockholders. In this transaction the Company repurchased 15,540 shares
from Mr. Braden for an aggregate purchase price of $490,240, and 3,108 shares
from Mr. Wilk for an aggregate purchase price of $98,048. In addition, in
connection with the Company's public stock offering in May 1996, the Company
repurchased an aggregate of 3,194,374 shares of the Company's Class A Common
Stock at a price of $28.92, including 425,000 shares from Mr. Greaves, 75,228
shares from Mr. Braden and 15,000 shares from Mr. Wilk. Pursuant to the terms of
the Trust Agreement the Trust was terminated effective February 7, 1997.
On September 30, 1996 the Board of Directors terminated all of the Company's
stock repurchase programs in connection with the FHS Combination.
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ACTIVITIES OF THE BOARD OF DIRECTORS AND ITS COMMITTEES
Members of the Board of Directors are elected by the holders of Class A
Common Stock of the Company and represent the interests of all stockholders. The
Board of Directors meets periodically to review significant developments
affecting the Company and to act on matters requiring board approval. Although
the Board of Directors delegates many matters to others, it reserves certain
powers and functions to itself.
HSI's Board of Directors met once during the first three months of 1997
(prior to the FHS Combination), and the Company's Board of Directors met a total
of six times in 1997 subsequent to the FHS Combination. Each member of the Board
of Directors of the Company and of HSI was present for 75% or more of the total
number of meetings of such Board of Directors and the total number of meetings
held by all committees of such Board of Directors in 1997 on which he served.
COMMITTEES OF THE BOARD OF DIRECTORS
The By-Laws provide that during the Transition Period, the Audit Committee,
the Committee on Directors and the Compensation and Stock Option Committee (the
"Compensation Committee") of the Board of Directors will each consist of four
independent directors, two of whom shall be HSI Designees and two of whom shall
be FHC Designees. During the Transition Period, the Chairman of each of the
Committee on Directors and the Audit Committee will be selected from the FHC
Designees and the Chairman of the Compensation Committee will be selected from
the HSI Designees. Following the Transition Period, a majority of the Board of
Directors may select the directors (who do not have to be independent directors
unless required by law or applicable stock exchange regulations) to serve on the
committees of the Board of Directors.
AUDIT COMMITTEE. The Audit Committee of the Board of Directors of the
Company currently consists of Messrs. Deukmejian, Farley, Fowler (Chairman) and
Stegemeier, each of whom is a non-employee director. This committee is directed
to review the scope, cost and results of the independent audit of the Company's
books and records, the results of the annual audit with management and the
internal auditors and the adequacy of the Company's accounting, financial and
operating controls; to recommend annually to the Board of Directors the
selection of the independent auditors; to approve the appointment or removal of
the independent audit manager; to consider proposals made by the Company's
independent auditors for consulting work; to oversee the Company's compliance
with certain regulatory programs to deter fraud and abuse; and to report to the
Board of Directors, when so requested, on any accounting or financial matters.
The HSI Audit Committee (the predecessor committee to the Audit Committee of the
Company) functioned in substantially the same capacity and held no meetings
during the first three months of 1997 (prior to the FHS Combination). The
Company's Audit Committee held twelve meetings in 1997 subsequent to the FHS
Combination.
COMMITTEE ON DIRECTORS OF THE BOARD. The Committee on Directors (formerly
named the Nominating Committee) of the Board of Directors of the Company
currently consists of Messrs. Deukmejian, Greaves, Hanselman (Chairman) and
Foley. The Committee on Directors is responsible for reviewing qualifications of
individuals suggested as possible candidates for election as directors of the
Company from whatever sources such suggestions arise. In connection with that
direction, the Committee on Directors nominated for reelection each of the three
Class II directors, all of whose current terms expire at the Annual Meeting.
Stockholders who wish to propose nominations for directors for consideration at
the 1999 Annual Meeting of Stockholders may do so in accordance with the
procedures described below under "REQUIREMENTS AND PROCEDURES FOR SUBMISSION OF
PROXY PROPOSALS AND NOMINATIONS OF DIRECTORS BY STOCKHOLDERS--Nominations for
the Board of Directors." The HSI Nominating Committee (the predecessor committee
to the Committee on Directors) functioned in substantially the same capacity and
held no meetings during the first three months of 1997 (prior to the FHS
Combination). The Company's Committee on Directors held three meetings in 1997
subsequent to the FHS Combination.
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COMPENSATION AND STOCK OPTION COMMITTEE. The Compensation Committee
currently consists of Messrs. Bouchard (Chairman), Farley, Hanselman and Troubh.
Each of the current members is a "non-employee director" of the Company as such
term is defined in Rule 16b-3 adopted under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). In addition, each of the current members is an
"outside director" as such term is defined in Section 162(m) of the Code. The
By-Laws and the policies of the Board of Directors direct the Compensation
Committee: (a) to recommend to the Board of Directors the compensation,
including direct regular compensation, stock options or other appropriate
incentive plans, and perquisites, if any, of the two most highly compensated
Corporate Officers (as defined in the By-Laws) of the Company, which
recommendations are subject to ratification, modification or rejection by the
Board of Directors; (b) to approve the compensation, including direct regular
compensation, stock options or other appropriate incentive plans, and
perquisites, if any, of up to thirty-five senior officers of the Company and its
subsidiaries including the two Corporate Officers covered in (a) above, which
senior officers are designated by the Compensation Committee in consultation
with management; (c) to review and approve, on a general policy level basis
only, the compensation and benefits of officers, managers and employees other
than those covered in (a) and (b) above, based on management's presentation of
all relevant factors of proposed actions in totality, and advise the Board of
Directors of actions taken, and such compensation and benefit matters shall be
deemed within the Compensation Committee's general oversight; (d) to recommend
to the Board of Directors corporate-wide policies with respect to direct regular
compensation, stock options or other appropriate incentive plans, and
perquisites, if any; (e) to administer and implement the Company's stock option
or other stock-based and equity-based benefit plans (the "Plans"), including the
review and approval of all grants thereunder; (f) to fulfill the purposes of the
Plans including, without limitation, through the conditional grant of options
and other benefits under the Plans; (g) to recommend to the Board of Directors
any revisions or additions to the Plans; (h) to recommend to the Board of
Directors appropriate actions with respect to modification, revision or
termination of trusteed employee benefit or welfare plans (such as 401(k) or
pension plans), with action with respect to such trusteed plans being reserved
to the Board of Directors; and (i) to review and report to the Board of
Directors, when so requested, on any compensation matter.
In 1997, the HSI Compensation Committee (the predecessor committee to the
Compensation Committee of the Company) functioned in substantially the same
capacity and consisted of the following individuals: Messrs. Bouchard (Chairman)
and Farley and J. Kevin Murphy. The HSI Compensation Committee held six meetings
during the first three months of 1997 (prior to the FHS Combination), most of
which meetings were not held in person but were held by means of teleconference
equipment pursuant to which all participants could hear each other to discuss
specific issues relating to the FHS Combination. The Company's Compensation
Committee held eleven meetings in 1997 subsequent to the FHS Combination.
FINANCE COMMITTEE. The Finance Committee (formerly named the Investment
Policy Committee) of the Board of Directors of the Company currently consists of
Dr. Hasan (Chairman) and Messrs. Greaves, Hanselman and Troubh. This Committee
is directed and empowered to: review the Company's investment policies and
guidelines; monitor performance of the Company's investment portfolio; in
coordination with the Audit Committee, 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. Among other responsibilities, the Committee establishes
appropriate authority levels for various officers of the Company with respect to
mergers and acquisitions transactions, divestitures transactions and capital
expenditures. The Committee also reviews and recommends appropriate action with
respect to the Company's short- and long-term debt structure. The Company's
Finance Committee held five meetings in 1997 subsequent to the FHS Combination
(at which time the Committee was created).
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REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEE ON
EXECUTIVE COMPENSATION FOR FISCAL YEAR 1997
INTRODUCTION AND BACKGROUND
The following report is provided in accordance with the rules of the
Securities and Exchange Commission and covers compensation policies applicable
to the executive officers of Foundation Health Systems, Inc. (the "Company")
during 1997. The report has been approved by the members of the Compensation and
Stock Option Committee of the Board of Directors of the Company (the
"Compensation Committee"), which functions in substantially the same capacity as
the prior Compensation and Stock Option Committee (the "Predecessor Committee")
of Health Systems International, Inc. ("HSI"). The Predecessor Committee was in
existence during the first three months of 1997 (prior to the merger (the "FHS
Combination") involving HSI and Foundation Health Corporation that was
consummated on April 1, 1997).
In 1997 the Predecessor Committee was comprised of Messrs. Bouchard
(Chairman), Farley and Murphy, each of whom was an "outside director" within the
meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"). Following the FHS Combination the Compensation Committee's membership
was increased to four "outside directors" (within the meaning of Section 162(m)
of the Code) to include Messrs. Bouchard (Chairman), Hanselman, Farley and
Troubh. As of the date of this report, the Compensation Committee continues to
be comprised of these four members.
Under the Company's By-Laws, as was the case prior to the FHS Combination,
the Compensation Committee is responsible for recommending to the Board of
Directors the compensation levels of the Chief Executive Officer and the most
highly compensated officer other than the Chief Executive Officer and approving
the compensation levels of certain other senior executives, including the "Named
Executive Officers" listed below in the Summary Compensation Table. The
Compensation Committee is also responsible for the administration of the
Company's stock option and other stock-based and equity-based plans.
The Predecessor Committee took no substantive action applicable to 1997
compensation (other than the amendment and restatement of Dr. Hasan's employment
agreement referenced elsewhere in this Proxy Statement), due to the pending FHS
Combination and the Predecessor Committee's desire to permit the new
Compensation Committee members to establish the 1997 compensation philosophy for
the combined Company. As a result, this report in general concerns the
philosophy and actions of the new Compensation Committee during 1997.
COMPENSATION PHILOSOPHY
The Compensation Committee designed the current compensation system to
include three components: base salary, short-term incentive pay in the form of
an annual cash bonus opportunity and long-term equity based incentive
compensation. Compensation decisions were based upon competitive market pay
practices, corporate or unit performance and individual contributions. The
Compensation Committee, with the assistance of independent consultants,
developed base line and target compensation levels based on pay practices of a
group of seven healthcare organizations with annual revenues ranging from $3.1
billion to $18.5 billion. All of these companies whose stock is currently
publicly traded are included in the "Selected Peer Group" in the stock
performance graph set forth later in this Proxy Statement.
The Compensation Committee's philosophy is to establish base salaries below
the median for the peer group, but to provide an opportunity for total cash
compensation (base salary plus annual cash bonus) to reach the top quartile
based on corporate performance relative to the peer group. In this way, the
Compensation Committee seeks to have a significant portion of annual
compensation at risk. In addition, the Compensation Committee awarded a
meaningful number of stock options in 1997 to certain executives with a view
toward directly aligning each such executive's long-term financial interests
with the shareholders and advancing the interests of the Company by retaining
talented executives. The options
17
<PAGE>
granted in 1997 provide for termination of the options and a "clawback" of
realized gains if the executive resigns and joins a competitor.
BASE SALARY
During 1997 the base salary levels of Dr. Hasan and Dr. Berkbigler were
governed by their respective employment agreements that became effective in
connection with the merger in 1994 involving Health Net and QualMed, Inc. that
formed HSI, which employment agreements provided for salary increases of a
minimum of 7% per year. Dr. Hasan's employment agreement was amended and
restated in 1997 in connection with the FHS Combination. The base salary level
of Mr. Elder was governed by his employment agreement which was entered into in
connection with the FHS Combination.
The base salaries of the other Named Executive Officers were adjusted in
1997 after a comprehensive review with outside independent consultants to align
such salaries with the compensation philosophy referenced above. Notwithstanding
such philosophy, however, the base salaries of the Named Executive Officers in
1997, on average, exceeded the median level of the peer group of healthcare
companies due to the base salary contractual commitments referenced above.
ANNUAL CASH BONUS
Pursuant to the Company's Performance-Based Annual Bonus Plan (the "Bonus
Plan") applicable for 1997 previously adopted by its stockholders, annual cash
bonuses for the Named Executive Officers, including the Chief Executive Officer,
are based on consolidated income from operations before taxes, as determined in
accordance with generally accepted accounting principles. As described below, no
bonuses were paid under the Bonus Plan for the Company's last fiscal year.
Under the Bonus Plan, the annual bonuses are based on a maximum cash bonus
pool equal to 2.5% of consolidated income from operations before taxes, provided
that the annual performance goal of $62.5 million of such consolidated income is
met. Subject to review and certification by the Compensation Committee, each
participant was eligible to receive a pro rata share of the bonus pool based on
the relationship at the beginning of the relevant year of his salary to the
combined salaries of all participants. Under the terms of the Bonus Plan, the
Compensation Committee retains the discretion to reduce or eliminate awards to
any participant based on its consideration of any extraordinary changes which
may have occurred during the year as well as business performance criteria such
as net income, cash flow, earnings per share and other relevant strategic
considerations. It is the intent of the Compensation Committee to utilize such
discretion in administering this Bonus Plan and the new Performance-Based Annual
Bonus Plan adopted by the Company's stockholders to be effective for the 1998
calendar year.
The performance goal of $62.5 million in consolidated income from operations
before taxes under the Bonus Plan was not met for 1997. As a result, no bonuses
were paid under the Bonus Plan for 1997.
STOCK OPTIONS
During 1997, the Company granted a significant number of stock options to
the Chief Executive Officer and the other Named Executive Officers. The size of
the option grants reflected a three year "mega grant" in that no additional
future option grants would be considered for such Named Executive Officers until
after a three year period. In determining the number of options to be granted,
the Compensation Committee considered the advice of outside consultants, which
was based upon the competitive practices at the group of peer companies, as well
as each individual executive's position and potential for helping the Company to
achieve its long-term objectives. All of such options were granted on September
4, 1997 under the Company's 1997 Stock Option Plan at an exercise price of
$32.50 per share, which was the fair market value of FHS common stock on such
date, and vest in three equal traunches on each of the first three anniversaries
of the date of grant. All such options have a ten year term and are subject to
standard terms and conditions. As referenced above, all of such options provide
for termination and a "clawback" of realized gains if the executive resigns and
joins a competitor.
18
<PAGE>
During 1997, the Compensation Committee awarded 850,000 options to Dr.
Hasan. The size of this grant was established in part by reference to the peer
group survey and with a view toward incentivizing Dr. Hasan in his key role in
establishing the future direction of the Company and implementing its goals.
Although Mr. Elder was not granted any options in 1997 because it was
anticipated that his employment relationship with the Company would terminate
after a sufficient FHS Combination phase-in period, Mr. Elder was granted a
cash-only stock appreciation right ("SAR") covering 100,000 underlying shares of
FHS common stock in connection with his termination of employment on December
31, 1997 and the entering into of an independent consulting agreement between
the Company and him in connection therewith. The strike price of such SAR was
set at the exercise price for the 1997 option grants referenced above and
provides Mr. Elder with the right to receive a cash payment one year after his
employment termination to the extent the market price at such time exceeds the
SAR strike price.
Stock options are considered effective long-term incentives by the
Compensation Committee because an executive receives a gain only if the
Company's stock value increases and its stockholders also receive a gain. The
Compensation Committee intends to continue to use options and other equity-based
incentives as the primary element of long-term compensation for the Company's
executive officers.
COMPENSATION DEDUCTIBILITY POLICY
The Compensation Committee's policy with respect to the tax deductibility of
compensation in excess of $1 million payable to each of the Named Executive
Officers is to comply with the requirements of Section 162(m) of the Code
applicable to qualified performance-based compensation to the extent such
compliance is practicable and in the best interest of the Company and its
stockholders.
J. Thomas Bouchard, Chairman
Thomas T. Farley
Richard W. Hanselman
Raymond S. Troubh
Dated: March 28, 1998
19
<PAGE>
STOCK PERFORMANCE GRAPH
The following graph compares the performance of the Company's Class A Common
Stock with the performance of the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index") and a peer group index from January 31, 1994 (the
first trading day of HSI Class A Common Stock) to December 31, 1994, 1995, 1996
and 1997. The graph assumes that $100 was invested on January 31, 1994 in each
of the Class A Common Stock, the S&P 500 Index and the peer group index, and
that all dividends were reinvested.
The Company has created a peer group index that includes the following
companies: Humana Inc., PacifiCare Health Systems, Inc., WellPoint Health
Networks Inc., United Healthcare Corporation, Oxford Health Plans, Inc.,
Mid-Atlantic Medical Services, Inc., Coventry Corporation, Aetna, Inc., Tenet
Healthcare Corporation and Columbia/HCA Healthcare Corporation. The peer group
index weighs the constituent companies' stock performance on the basis of market
capitalization at the beginning of the period.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG FOUNDATION HEALTH
SYSTEMS, INC., S&P 500 INDEX AND PEER GROUP INDEX
FROM JANUARY 31, 1994 TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
FOUNDATION HEALTH S&P 500 SELECTED PEER
SYSTEMS, INC. INDEX GROUP
------------------- ----------- -------------
<S> <C> <C> <C>
January 31, 1994....................................................... $ 100 $ 100 $ 100
December 31, 1994...................................................... $ 147 $ 98 $ 99
December 31, 1995...................................................... $ 156 $ 134 $ 139
December 31, 1996...................................................... $ 120 $ 165 $ 129
December 31, 1997...................................................... $ 107 $ 219 $ 132
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
FOUNDATION HEALTH SYSTEMS,
INC. S&P 500 INDEX SELECTED PEER GROUP
<S> <C> <C> <C>
31-Jan-94 100 100 100
31-Dec-94 147 98 99
31-Dec-95 156 134 139
31-Dec-96 120 165 129
31-Dec-97 107 219 132
</TABLE>
20
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following tables and descriptive materials set forth separately, for the
fiscal years indicated, each component of compensation paid or awarded to, or
earned by, (i) Dr. Hasan, the Chief Executive Officer of the Company in 1997,
and (ii) each of the four other most highly compensated executive officers
serving as of the end of the 1997 fiscal year (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
--------------------------
AWARDS
----------- PAYOUTS
ANNUAL COMPENSATION SECURITIES -------------
NAME AND PRINCIPAL -------------------------- UNDERLYING LTIP ALL OTHER
POSITION SALARY ($) OPTIONS/ PAYOUTS COMPENSATION
WITH THE COMPANY IN 1997 YEAR (1)(2) BONUS ($) SARS (#) ($) ($)(2)
- ------------------------- --------- ------------ ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Malik M. Hasan, M.D. 1997 983,100 0 850,000 0 34,757(3)
Chairman of the Board 1996 937,417 0 300,000 0 843,334(4)
of Directors and 1995 910,441 800,000 0 0 189,954(5)
Chief Executive Officer
Jay M. Gellert 1997 450,000 0 600,000 0 866(6)
President and Chief 1996 247,917(7) 0 100,000 0 3,278(8)
Operating Officer 1995 -- -- -- -- --
Dale T. Berkbigler, M.D. 1997 385,200 0 175,000 0 4,336(9)
Executive Vice 1996 360,000 0 92,000 0 2,633(10)
President and 1995 359,099 115,000 0 0 79,478(11)
Chief Medical Officer
Arthur M. Southam, M.D. 1997 350,000 0 175,000 0 820(12)
President of FHS 1996 174,519(13) 361,138(14) 65,000 0 459(15)
California Division 1995 -- -- -- -- --
Jeffrey L. Elder 1997 315,000 0 100,000 0 1,814,008 (16)
Senior Vice President 1996 303,692 411,600 30,000 0 170,048 (17)
and 1995 260,005 210,000 30,000 0 144,714 (18)
Chief Financial Officer
</TABLE>
(1) Includes amounts deferred pursuant to the FHC Deferred Compensation Plan
and the Company's (and FHC's) Profit Sharing and 401(k) Plans (other than
as set forth in footnote (2) below).
(2) The figures contained in this column do not include the value of the
following number of shares of the Company's Class A Common Stock which were
awarded to the named individuals for the 1995 plan year under the Company's
profit sharing component of its 401(k) plan: Dr. Hasan (265 shares) and Dr.
Berkbigler (172 shares). No such shares were awarded for the 1996 plan year
or the 1997 plan year to any of the named individuals.
(3) This amount includes $2,969 in matching contributions under the Company's
401(k) Plan, $25,754 deemed to be compensation under the rules of the SEC
related to the present value of premiums paid by the Company for the
benefit of Dr. Hasan under a split-dollar life insurance program and $6,034
in premiums paid by the Company on a life insurance policy.
(4) This amount includes $818,918 in accrued employer contributions under the
Company's prior SERP, $2,375 in matching contributions under the Company's
401(k) plan, $17,991 deemed to be compensation under the rules of the SEC
related to the present value of premiums paid by the Company for the
benefit of Dr. Hasan under a split-dollar life insurance program and $4,050
in premiums paid by the Company on a life insurance policy.
(5) This amount includes $178,046 in accrued employer contributions under the
Company's prior SERP, $2,310 in matching contributions under the Company's
401(k) plan, $8,680 deemed to be compensation under the rules of the SEC
related to the present value of premiums paid by the Company for the
benefit of Dr. Hasan under a split-dollar life insurance program and $918
in premiums paid by the Company on a life insurance policy.
(6) This amount includes $866 in premiums paid by the Company on a life
insurance policy.
(7) Mr. Gellert became an officer of the Company in June 1996 and this base
salary therefore represents only the seven months of 1996 during which he
was so employed.
(8) This amount includes $3,278 in premiums paid by the Company on a life
insurance policy.
(9) This amount includes $2,969 in matching contributions under the Company's
401(k) Plan and $1,367 in premiums paid by the Company on a life insurance
policy.
21
<PAGE>
(10) This amount includes $1,067 in matching contributions under the Company's
401(k) plan and $1,566 in premiums paid by the Company on a life insurance
policy.
(11) This amount includes $75,486 in accrued employer contributions under the
Company's prior SERP, $2,310 in employer matching contributions made under
the Company's 401(k) plan and $1,682 in premiums paid by the Company on a
life insurance policy.
(12) This amount includes $820 in premiums paid by the Company on a life
insurance policy.
(13) Dr. Southam became an officer of the Company in July 1996 and this base
salary therefore represents only the six months of 1996 during which he was
so employed.
(14) This amount includes $75,000 paid to Dr. Southam as a signing bonus upon
his hire, $62,500 as a guaranteed bonus earned in 1996 and $223,638 as a
payment in an amount to represent SERP benefits he forfeited because of his
change of employment.
(15) This amount includes $459 in premiums paid by the Company on a life
insurance policy.
(16) This amount includes $1,476,352 in final payouts under the prior FHC SERP,
$228,199 in FHC matching contributions under the prior FHC Deferred
Compensation Plan, $4,750 in matching contributions under the FHC 401(k)
Plan, $6,231 deemed to be compensation under the rules of the SEC related
to the present value of the premium payments made by FHC for the benefit of
Mr. Elder under the FHC split-dollar life insurance program, $40,193 in
taxable fringe benefits, $57,813 paid to Mr. Elder for the reimbursement of
tax obligations and $470 in premiums paid by the Company on a life
insurance policy.
(17) This amount includes $71,597 in FHC matching contributions under the prior
FHC Deferred Compensation Plan, $4,500 in matching contributions under the
FHC 401(k) Plan, $3,552 deemed to be compensation under the rules of the
SEC related to the present value of the premium payments made by FHC for
the benefit of Mr. Elder under the FHC split-dollar life insurance program,
$44,513 in taxable fringe benefits and $45,886 paid to Mr. Elder for the
reimbursement of tax obligations.
(18) This amount includes $47,006 in FHC matching contributions under the prior
FHC Deferred Compensation Plan, $4,500 in matching contributions under the
FHC 401(k) Plan, $6,512 deemed to be compensation under the rules of the
SEC related to the present value of the premium payments made by FHC for
the benefit of Mr. Elder under the FHC split-dollar life insurance program,
$41,164 in taxable fringe benefits and $45,532 paid to Mr. Elder for the
reimbursement of tax obligations.
22
<PAGE>
OPTION GRANTS IN 1997
The following table summarizes option grants in 1997 to the Named Executive
Officers of the Company.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF POTENTIAL REALIZABLE VALUE
SECURITIES % OF TOTAL AT ASSUMED ANNUAL RATES OF
UNDERLYING OPTIONS/SARS STOCK PRICE APPRECIATION FOR
OPTIONS/SARS GRANTED TO EXERCISE OR OPTION TERM (B)
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION ----------------------------
NAME (#) (A) FISCAL YEAR ($/SHARE)(A) DATE 5% ($) 10% ($)
- --------------------------- ------------- ------------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Malik M. Hasan, M.D........ 850,000 21.7% $ 32.50 9/4/07 $ 17,373,214 $ 44,027,135
Jay M. Gellert............. 600,000 15.3% $ 32.50 9/4/07 $ 12,263,445 $ 31,077,978
Arthur M. Southam, M.D..... 175,000 4.5% $ 32.50 9/4/07 $ 3,576,838 $ 9,064,410
Dale T. Berkbigler, M.D.... 175,000 4.5% $ 32.50 9/4/07 $ 3,576,838 $ 9,064,410
Jeffrey L. Elder (c)....... 100,000 100.0%(d) $ 32.50 12/31/98 $ 223,889(e) $ 442,975(e)
</TABLE>
(a) All options granted in 1997 were non-qualified stock options granted
pursuant to the Company's 1997 Stock Option Plan. All grants in 1997 to the
Named Executive Officers provided for vesting of 33 1/3% of the options on
each of the first, second and third anniversaries of the date of grant. All
1997 grants to the Named Executive Officers were at an exercise price equal
to the closing price of the Class A Common Stock on the NYSE on the date on
which such grants were made.
(b) The potential gains shown are net of the option exercise price and do not
include the effect of any taxes associated with the exercise. The amounts
shown are the assumed rates of appreciation only, and do not constitute
projections of future stock price performance, and may not necessarily be
realized. Actual gains, if any, on stock option exercises depend on the
future performance of the Class A Common Stock, continued employment of the
optionee through the term of the option and other factors.
(c) Mr. Elder was granted a cash-only stock appreciation right ("SAR") with
respect to 100,000 shares of the Company's Class A Common Stock. The SAR
entitles Mr. Elder to receive from the Company within ten (10) days after
December 31, 1998 an amount in cash equal to the excess (if any) of (i) the
average market price of a share of the Company's Class A Common Stock on the
New York Stock Exchange during the twenty (20) days prior to December 31,
1998 over (ii) $32.50 for each of the 100,000 shares associated with the
SAR.
(d) No other SARs were granted during the year.
(e) Assumes a term of 1 1/2 years from the date the exercise price was set
(September 4, 1997).
23
<PAGE>
OPTION EXERCISES IN 1997
The following table summarizes the number and value of options exercised
during 1997, as well as the number and value of unexercised options as of
December 31, 1997, held by the Named Executive Officers of the Company.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS/SARS AS OF DECEMBER VALUE OF UNEXERCISED IN-THE-
SHARES 31, 1997 (A) MONEY OPTIONS/SARS AS OF
ACQUIRED ON VALUE ----------------------------- DECEMBER 31, 1997 (B)
EXERCISE REALIZED UNEXERCISABLE ------------------------------
NAME (#) ($) EXERCISABLE (C) EXERCISABLE UNEXERCISABLE
- ---------------------------- ----------- ----------- ----------- ---------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Malik M. Hasan, M.D......... 20,000 $ 263,600 690,000 850,000 $ 404,800 $ 0
Jay M. Gellert.............. 0 $ 0 100,000 600,000 $ 0 $ 0
Arthur M. Southam, M.D...... 0 $ 0 65,000 175,000 $ 25,000 $ 0
Dale T. Berkbigler, M.D..... 1,277(d) $ 47,500 132,000 175,000 $ 110,625 $ 0
Jeffrey L. Elder............ 0 $ 0 181,999 100,000 $ 61,489 $ 0
</TABLE>
(a) The exercise price of outstanding options at December 31, 1997 ranges from
$12.125 to $44.06 per share. Options to purchase an aggregate of 400,000
shares held by Dr. Hasan have an exercise price of either 115% or 125% of
the fair market value of the underlying shares on the date of grant, options
to purchase an aggregate of 15,000 shares held by Dr. Southam have an
exercise price of 120% of the fair market value of the underlying shares on
the date of grant and all other options held by Dr. Hasan, Dr. Southam and
the other Named Executive Officers have exercise prices equal to the fair
market value of the underlying shares on the date of grant.
(b) Based on the difference between the closing price of $22.25 of Class A
Common Stock on the NYSE on December 31, 1997 (the last trading day in 1997)
and the option exercise price.
(c) Under the terms of the Company's Second Amended and Restated 1991 Stock
Option Plan, all outstanding options of Dr. Hasan, Mr. Gellert, Dr.
Berkbigler and Dr. Southam held as of October 1, 1996 became immediately
exercisable as a result of approval by the Board of Directors of the FHS
Combination. All of the outstanding options of Mr. Elder became exercisable
on April 1, 1997 as a result of consummation of the FHS Combination pursuant
to the terms of his employment agreement.
(d) An aggregate of 3,723 shares otherwise issuable were withheld from the
exercise by Dr. Berkbigler of nonqualified stock options to purchase 5,000
of the Company's Class A Common Stock at an exercise price of $14.875 per
share to satisfy exercise price and tax withholding obligations, with the
result that 1,277 net shares of Class A Common Stock were issued to Dr.
Berkbigler in the exercise.
24
<PAGE>
SUPPLEMENTAL EXECUTIVE RETIREMENT PROGRAMS
HSI had in effect through December 31, 1995 a Supplemental Executive
Retirement Plan ("SERP") program that allowed executives to defer income on a
non-qualified pre-tax basis (the "Prior SERP"). The Company matched 100% of the
deferral amounts up to a pre-set limit. These amounts accumulated earnings based
upon executive investment elections. Under the program an additional 78.5% of
the accumulated deferral and Company match amounts became payable to an
executive upon termination of his employment. Contributions, including executive
deferral and company matches, were terminated December 31, 1995 and
participating executives will be eligible for a payment equal to their account
value as of December 31, 1995 upon termination of employment. Only Drs. Hasan
and Berkbigler participated in the Prior SERP, and neither of Mr. Gellert, Mr.
Elder nor Dr. Southam was a participant in the Prior SERP.
A new SERP was approved by HSI effective January 1, 1996 (the "New SERP").
The New SERP ensures that executives who retire upon or after age 62 and who
have worked for HSI or a predecessor organization for at least 15 years receive
50% of average pay (salary and bonus) when combined with Social Security and all
other employer provided retirement benefits provided under current and prior
programs. These programs include the accumulated value of Company contributions
to the Company's 401(k) plan and benefits accrued under the Prior SERP.
Executives with less than 15 years of service at age 62 will receive a reduced
benefit under the New SERP, and executives must accrue at least five years of
service to receive a partial benefit. Those terminating with between 5 and 10
years of service are entitled to receive a partial benefit, and executives who
terminate with 10 or more years of service will be 100% vested on earned
benefits. Monthly accrued benefits payable at age 62 and accrued through
December 31, 1997 under the New SERP for the Named Executive Officers are: Dr.
Hasan, $34,211; Dr. Berkbigler, $11,976; Mr. Gellert, $935; and Mr. Southam,
$425. Mr. Elder was not a participant in the New SERP.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
EMPLOYMENT AGREEMENTS WITH DRS. HASAN AND BERKBIGLER. Each of Drs. Hasan
and Berkbigler has an Employment Agreement with the Company (collectively, the
"Employment Agreements"). Each of the Employment Agreements became effective and
was assumed by the Company upon consummation of the HSI Combination. Each of the
Employment Agreements has a five-year term, with an automatic one-year extension
on each anniversary of the agreement.
The Employment Agreements provide for a minimum 7% increase in annual salary
each year. During the term of his employment, each of Drs. Hasan and Berkbigler
is eligible to participate in the various insurance, stock option, pension,
incentive compensation and other fringe benefit plans and programs of the
Company. Each of Drs. Hasan and Berkbigler also is reimbursed for reasonable
business expenses in performing his duties.
If the Company terminates the employment of either of Drs. Hasan or
Berkbigler without "cause" or if such executive terminates his employment for
"good reason" (each as defined in the Employment Agreements), during the period
commencing on the effective date of such termination and ending 36 months after
the date of such termination, the Company will pay such executive his base
salary and shall continue such executive's medical, health and accident
insurance at the same coverage level maintained for such executive's benefit
immediately prior to the date of termination. In the event that payments to Dr.
Hasan would be subject to the "golden parachute" excise tax under Section 4999
of the Code, the Company is obligated to provide him with a tax gross-up payment
in an amount sufficient to offset the effects of such excise tax.
On March 10, 1997, in connection with the FHS Combination, Dr. Hasan's
Employment Agreement was amended and restated effective as of January 1, 1997
(the "Amended Employment Agreement"). The Amended Employment Agreement has a
five-year term beginning on the Effective Date, with an automatic one-year
extension on each anniversary of the agreement. The Amended Employment Agreement
provides for a three-year stay bonus to be paid for the fiscal years ending
1997, 1998 and 1999. The stay bonus is subject to certain performance objectives
as set forth in the Amended Employment
25
<PAGE>
Agreement. In addition, the Amended Employment Agreement provides that the base
amount of the 36-month severance benefit provided for in the Employment
Agreement will include an amount equal to the average of the annual bonus paid
to Dr. Hasan (excluding the stay bonus referred to above) for the three fiscal
years ending before the date of his resignation or termination.
EMPLOYMENT AGREEMENT WITH MR. GELLERT. Mr. Gellert has a revised Employment
Letter Agreement with the Company dated August 22, 1997 (the "Gellert Employment
Letter Agreement"). During the term of his employment, Mr. Gellert is eligible
to participate in various insurance, stock option, pension, incentive
compensation and other fringe benefit plans and programs of the Company. Mr.
Gellert also is reimbursed for reasonable business expenses in performing his
duties and is provided with a monthly automobile allowance.
The Gellert Employment Letter Agreement provides Mr. Gellert with two
potential severance arrangements. If during a two-year period following a
"change-of-control" transaction, the Company terminates the employment of Mr.
Gellert or he voluntarily resigns for "good reason" (each as defined in the
Gellert Employment Letter Agreement) he will receive severance pay equal to
three years of his then current annual base salary and targeted bonus. Such
severance pay will not exceed the applicable limitations under Section 280G of
the Code (to avoid penalty taxes and deduction limitations on "excess parachute
payments") but the Company agrees to consider in good faith proposals to
restructure such pay in the event such pay is limited by Section 280G.
If the Company terminates the employment of Mr. Gellert other than following
a change-of-control or for "just cause" (as defined in the Gellert Employment
Letter Agreement), Mr. Gellert will be entitled to receive a severance payment
equal to three years of his then current annual base salary and targeted bonus.
In addition, the Company will engage Mr. Gellert as a consultant for a
consulting fee equal to two years of his then targeted bonus and all stock
options which are vested on the date of his termination shall remain exercisable
during the term of his service as a consultant. These severance payments will be
made to Mr. Gellert on a monthly basis for a three-year period. Such severance
and consulting payments are contingent upon Mr. Gellert's compliance with the
non-compete provisions set forth in the Gellert Employment Letter Agreement.
EMPLOYMENT AGREEMENT WITH DR. SOUTHAM. Dr. Southam has an Employment Letter
Agreement with the Company dated June 4, 1996 (the "Southam Employment Letter
Agreement"). During the term of his employment, Dr. Southam is eligible to
participate in various insurance, stock option, pension, incentive compensation
and other fringe benefit plans and programs of the Company. Dr. Southam also is
reimbursed for reasonable business expenses in performing his duties and is
provided with a monthly automobile allowance.
The Southam Employment Letter Agreement provides Dr. Southam with two
potential severance arrangements. If during a two-year period following a
"change-of-control" transaction, the Company terminates the employment of Dr.
Southam or he voluntarily resigns for "good reason" (each as defined in the
Southam Employment Letter Agreement) he will receive severance pay equal to
three years of his then current annual base salary. Such severance pay will not
exceed the lesser of (i) $1.2 million or (ii) the applicable limitations under
Section 280G of the Code (to avoid penalty taxes and deduction limitations on
"excess parachute payments").
If the Company terminates the employment of Dr. Southam other than following
a change-of-control or for "just cause" or if he terminates his employment for
"good reason" (each as defined in the Southam Employment Letter Agreement) he
will be entitled to receive a severance payment equal to two years of his then
current annual base salary. Such severance payment will not exceed $800,000.
These severance payments will be made to Dr. Southam on a monthly basis for a
two-year period. Such severance payments are contingent upon Dr. Southam's
compliance with the non-compete provisions set forth in the Southam Employment
Letter Agreement.
TERMINATION AND CONSULTING AGREEMENT WITH MR. ELDER. The Company and Mr.
Elder entered into a Consulting and Settlement Agreement effective December 31,
1997 (the "Elder Consulting Agreement"),
26
<PAGE>
pursuant to which Mr. Elder resigned as Senior Vice President-Chief Financial
Officer of FHS and agreed to serve the Company as a consultant for a two year
period ending December 31, 1999 (the "Elder Consulting Period"). Pursuant to the
Elder Consulting Agreement, in settlement of all amounts to be received by Mr.
Elder under his employment agreement, Mr. Elder was paid $2,788,421, which
amount was paid as a cash lump sum and represented a restructuring of the timing
of payments of the consideration payable under his employment agreement (and did
not result in a change in the amount of such consideration). Under the Elder
Consulting Agreement, the Company will pay Mr. Elder a consulting fee of
$100,000 for the first 12 months of the Elder Consulting Period and $100,000 for
the second 12 months of the Elder Consulting Period. The Company will also
reimburse Mr. Elder for reasonable business expenses and Mr. Elder will continue
to receive certain fringe benefits. In addition, Mr. Elder has agreed to certain
provisions that do not allow him to compete with the Company during the Elder
Consulting Period.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Decisions regarding the Company's executive compensation are made by the
Compensation Committee. Prior to the FHS Combination, in 1997 the HSI
Compensation Committee (which functioned in substantially the same capacity of
the Company's Compensation Committee) consisted of Messrs. Bouchard (Chairman),
Farley and Murphy, each of whom was a "Non-Employee Director" as defined in Rule
16b-3 adopted under the Exchange Act, with respect to the plans administered at
the time of service on such committee.
Effective upon consummation of the FHS Combination, the Compensation
Committee was recomposed pursuant to the By-Laws to consist of Messrs. Bouchard
(Chairman), Farley, Hanselman and Troubh, each of whom is a "Non-Employee
Director" of the Company as defined in Rule 16b-3 adopted under the Exchange
Act, with respect to the plans administered by the Compensation Committee.
The following information relates to transactions by HSI during the first
three months of 1997 prior to consummation of the FHS Combination and by the
Company after consummation of the FHS Combination with the foregoing members of
the Compensation Committee of HSI and of the Company during such time.
Mr. Bouchard, a director of the Company, is Senior Vice President, Human
Resources of International Business Machines Corporation ("IBM"). During 1997,
the Company's Health Net subsidiary engaged IBM as a consultant with respect to
the management of certain provider benefits information. During 1997, Health Net
paid IBM approximately $212,000 in consulting fees for such services.
Mr. Farley, a director of the Company, is a partner in the law firm of
Petersen, Fonda, Farley, Mattoon, Crockenberg and Garcia, P.C., which law firm
was an employer group of a Company subsidiary in 1997 and continues to be such
an employer group. Premiums paid by such firm to this Company subsidiary totaled
approximately $36,750 in 1997.
27
<PAGE>
DIRECTORS' COMPENSATION FOR 1997
Prior to the FHS Combination in 1997 the annual retainer payable to
non-employee directors of HSI was $20,000 per year, and each non-employee
director who chaired a committee of the HSI Board of Directors was eligible to
receive an annual additional retainer of $4,000. Such non-employee directors
also received a $1,000 fee for each meeting of the HSI Board of Directors or
committee thereof attended. No fees were paid to employees of the Company for
service as a director.
Effective upon consummation of the FHS Combination, the annual retainer
payable to non-employee directors of the Company was increased to $30,000 per
year, and each non-employee director who chaired a committee of the Company
Board of Directors became eligible to receive an annual additional retainer of
$5,000. Such non-employee directors also receive a $2,000 fee for each meeting
of the Board of Directors attended, and a $1,000 fee for each committee meeting
attended. No fees are paid to employees of the Company for service as a
director.
In addition, in 1997 non-employee directors of the Company participated in
the Company's Third Amended and Restated Non-Employee Director Stock Option Plan
(the "Director Plan"), which was approved by the Company's Shareholders at the
1997 Annual Stockholders Meeting and which provided for initial grants and
automatic annual grants of nonqualified stock options to such directors. Each
such grant entitled the optionee to purchase 7,500 shares of Class A Common
Stock at an exercise price equal to the fair market value of Class A Common
Stock on the date of such grant. Each grant vests as to 20% of the shares each
year on the anniversary of the date of the grant, provided that the options
become immediately exercisable in the event of a "change in control" of the
Company, as defined in the Director Plan. Under the Director Plan, 500,000
shares of Class A Common Stock have been reserved for issuance.
On August 6, 1997 options to purchase 7,500 shares at an exercise price of
$31.50 per share were thereby granted to each of Messrs. Bouchard, Deukmejian,
Farley, Foley, Fowler, Greaves, Hanselman, Stegemeier and Troubh pursuant to the
formula provisions of the Director Plan.
In 1994, FHC adopted a retirement plan for non-employee directors (the "FHC
Retirement Plan"). The FHC Retirement Plan provides a retirement benefit to any
director who was not an employee of FHC and who was either a member of the FHC
Board of Directors as of July 1, 1994 or who thereafter became a member of the
FHC Board of Directors. 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 in which the director's earnings were highest, such three years being
selected from within the 10 final years such individual served as a director.)
times (ii) the director's vested percentage (which increases from 50% for three
years of service to 100% for 10 or more years of service) times (iii) 70%.
Directors who had less than three years of service with FHC were not entitled to
any benefits. The benefits will commence following the later of the date a
director attains age 60 or the date he or she ceases to be a director.
The FHC Retirement Plan was terminated effective April 22, 1997, and certain
lump sum payments were made in 1997 to the following former directors of FHC, as
follows: David A. Boggs, $166,426 (received in 1998); Earl B. Fowler, $229,005;
Richard W. Hanselman, $250,024; Richard J. Stegemeier, $136,870; Raymond S.
Troubh, $205,589; and Robert O. Anderson, $112,004.
28
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Set forth below is a tabulation indicating those persons or groups who are
known to the Company to be beneficial owners of more than 5% of the outstanding
shares of the Company's Class A Common Stock as of the Record Date. The
following information is based on reports on Schedule 13D or 13G filed with the
Securities and Exchange Commission or other reliable information.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
PERCENTAGE OF
BENEFICIAL PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) CLASS
- ---------------------------------------------------------------------------- ---------------------- -------------
<S> <C> <C>
Neuberger & Berman LLC...................................................... 11,920,570(2) 10.7%
605 Third Avenue, 40th Floor
New York, New York 10158
Sanford C. Bernstein & Co., Inc............................................. 10,405,181(3) 9.4%
767 Fifth Avenue
New York, New York 10153
Vanguard/Windsor Funds, Inc................................................. 9,334,160(4) 8.4%
100 Vanguard Blvd., P. O. Box 2600
Malvern, Pennsylvania 19355
Franklin Resources, Inc..................................................... 8,992,200(5) 8.1%
777 Mariners Island Blvd.
San Mateo, California 94404
MacKay-Shields Financial Corporation........................................ 6,533,700(6) 5.9%
9 West 57th Street
New York, New York 10019
Harris Associates L.P....................................................... 5,213,529(7) 4.7%
Two North LaSalle Street, Suite 500
Chicago, Illinois 60602
</TABLE>
- ------------------------
(1) The nature of beneficial ownership for shares shown in this column is sole
voting and investment power unless otherwise indicated herein, subject to
community property laws where applicable.
(2) Neuberger & Berman LLC is deemed to be a beneficial owner for purposes of
Rule 13(d) of the Exchange Act, since it has shared power to make decisions
whether to retain or dispose of, and in some cases the sole power to vote,
the securities of many unrelated clients. Neuberger & Berman LLC 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. Principals of Neuberger & Berman LLC own
36,500 shares. Principals own these shares in their own personal securities
account. Neuberger & Berman LLC disclaims beneficial ownership of these
shares since these shares were purchased with each principal's personal
funds and each partner has exclusive dispositive and voting power over the
shares held in their respective accounts. With regard to 9,974,900 shares,
Neuberger & Berman LLC 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 LLC and Neuberger & Berman Management Inc. serve as sub-
adviser and investment manager, respectively, of Neuberger & Berman's
various Mutual 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 LLC
advisory client has an interest of more than 5% of the outstanding Class A
Common Stock of the Company.
29
<PAGE>
(3) Sanford C. Bernstein & Co., Inc. ("SBC") is a registered investment
advisor/broker dealer. An aggregate of 10,405,181 shares of the Company's
Class A Common Stock are held for the accounts of one or more discretionary
clients of SBC. SBC has sole power to dispose of all such shares. SBC has
sole voting authority with respect to 6,160,918 of such shares. In addition,
one or more of SBC's clients have appointed an independent voting agent with
instructions to vote an additional 973,200 of such shares in the same manner
as SBC, and SBC's clients have the right to receive dividends from and the
proceeds of the sale of such shares.
(4) Vanguard/Windsor Funds, Inc. is an investment company registered under the
Investment Company Act of 1940 and, as such, is deemed a beneficial owner
for purposes of Rule 13(d) of the Exchange Act since it has sole power to
vote or direct the vote and shared power to dispose or to direct the
disposition of the shares listed in the table.
(5) Franklin Resources, Inc. ("FRI") is a parent holding company whose
wholly-owned subsidiaries Franklin Mutual Advisers, Inc. ("FMAI") and
Franklin Advisers, Inc. ("FAI") are investment advisors registered under the
Investment Advisors Act of 1940. One or more of FMAI's or FAI's advisory
clients is the legal owner of an aggregate of 8,992,00 shares of the
Company's Class A Common Stock. Pursuant to investment advisory agreements
with its respective advisory clients, each of FMAI and FAI has sole
investment discretion and voting authority with respect to such shares.
Charles B. Johnson and Rupert H. Johnson, Jr. (the "Principal Stockholders")
each owns in excess of 10% of the outstanding common stock of FRI and are
the principal shareholders of FRI. Each of the Principal Stockholders,
therefore, may be deemed to have indirect beneficial ownership over such
shares. The Principal Stockholders, FRI, FMAI and FAI disclaim any economic
interest or beneficial ownership in any of the Company's Class A Common
Stock. The address of each of the Principal Stockholders and FRI is as set
forth in the table above.
(6) MacKay-Shields Financial Corporation is an investment advisor registered
under the Investment Advisors Act of 1940 and, as such, is deemed to be a
beneficial owner for purposes of Rule 13(d) of the Exchange Act since it has
shared power to vote or direct the vote and shared power to dispose or
direct the disposition of the shares listed in the table.
(7) Harris Associates L.P. ("Harris"), an investment advisor registered under
the Investment Advisor Act of 1940, and Harris Associates, Inc., the general
partner of Harris, may be deemed to be beneficial owners for the purposes of
Rule 13(d) of the Exchange Act by reason of advisory and other relationships
between Harris and the persons who own the shares. Harris has shared power
to vote or direct the vote of 5,213,529 shares and sole power to dispose or
to direct the disposition of 2,063,059 shares and shared power to direct the
disposition of 3,150,470 shares. Harris has been granted the power to vote
shares in circumstances it determines to be appropriate in connection with
assisting its 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. In addition,
Harris serves as investment advisor to the Harris Associates Investment
Trust (the "Trust"), and various of Harris' officers and directors are also
officers and trustees of the Trust. Harris does not consider that the Trust
is controlled by such persons.
The Trust through its various series, beneficially owns 3,148,910 shares
which are included in shares over which Harris has shared voting and dispositive
power. In addition, Harris serves as investment advisor to a small number of
other clients who own shares, but for which Harris does not have discretionary
authority but which are included as shares over which Harris has shared voting
and dispositive power.
The foregoing information relates only to the ownership of the Company's
Class A Common Stock. In addition, the CWF holds 10,297,642 shares of the
Company's Class B Common Stock, constituting all of the shares of that class and
approximately 8.5% of the Company's aggregate equity. Under the Certificate, the
shares held of record by the CWF are entitled to the same economic benefits as
all shares of Class A Common Stock, but are non-voting in nature. Upon the sale
or other transfer of any such shares by the CWF to an unrelated third party,
such shares are automatically converted on a one-to-one basis into fully
30
<PAGE>
voting shares of Class A Common Stock. Until December 31, 1998, transfer of such
shares is subject to certain restrictions set forth in the CWF Shareholder
Agreement.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the number of shares of Class A Common Stock
beneficially owned by each of the current directors of the Company, by each
Named Executive Officer of FHS in 1997 and by all current directors and
executive officers as a group as of the Record Date, and the percentage that
these shares bear to the total number of shares of Class A Common Stock
outstanding as of such date:
<TABLE>
<CAPTION>
AMOUNT OF SHARES
BENEFICIALLY PERCENTAGE
NAME OF INDIVIDUAL OR NUMBER OF PERSONS IN GROUP OWNED(1) OF CLASS
- ------------------------------------------------------------------------------- -------------------- -----------
<S> <C> <C>
Malik M. Hasan, M.D............................................................ 4,766,299(2) 4.3%
J. Thomas Bouchard............................................................. 25,000(3) *
George Deukmejian.............................................................. 26,399(4) *
Thomas T. Farley............................................................... 58,500(5) *
Patrick Foley.................................................................. 13,000(6) *
Earl B. Fowler................................................................. 48,650(7) *
Roger F. Greaves............................................................... 36,743(8) *
Richard W. Hanselman........................................................... 36,528(9) *
Richard J. Stegemeier.......................................................... 32,500(10) *
Raymond S. Troubh.............................................................. 52,453(11) *
Jay M. Gellert................................................................. 100,000(12) *
Dale T. Berkbigler, M.D........................................................ 504,292(13) *
Arthur Southam, M.D............................................................ 65,300(14) *
Jeffrey L. Elder............................................................... 181,999(15) *
All current executive officers and directors as a group (20 persons)........... 5,969,990(16) 5.3%
</TABLE>
- ------------------------
* The amount shown is less than 1% of the outstanding shares of each class.
(1) The information contained in this table is based upon information furnished
to the Company by the persons named above or obtained from records of the
Company. The nature of beneficial ownership for shares shown in this column
is sole voting and investment power unless otherwise indicated herein,
subject to community property laws where applicable.
(2) Includes 690,000 shares of Class A Common Stock with respect to which Dr.
Hasan has the right to acquire beneficial ownership by virtue of outstanding
vested options, 265 shares under the profit sharing plan component of the
Company's 401(k) plan and 9,680 shares owned by Dr. Hasan's wife. Does not
include 154,283 shares held by the Hasan Family Foundation (a private
charitable foundation of which Mrs. Hasan is the chairperson) or 46,880
shares held by each of his two youngest childrens' trusts (the sole trustee
of which is an unrelated third party).
(3) Includes 25,000 shares with respect to which Mr. Bouchard has the right to
acquire beneficial ownership by virtue of outstanding vested options.
(4) Includes 25,699 shares with respect to which Mr. Deukmejian has the right
to acquire beneficial ownership by virtue of outstanding vested options.
Such amount also includes 700 shares held in the C. George Deukmejian
Defined Benefit Pension Plan, of which Mr. Deukmejian is a trustee.
31
<PAGE>
(5) Includes 30,000 shares with respect to which Mr. Farley has the right to
acquire beneficial ownership by virtue of outstanding vested options. Such
amount also includes 10,000 shares held by the Farley Family Trust over
which trust Mr. Farley has investment power. Mr. Farley disclaims beneficial
ownership of the shares held by the Farley Family Trust.
(6) Includes 6,500 shares with respect to which Mr. Foley has the right to
acquire beneficial ownership by virtue of outstanding vested options and
6,500 shares with respect to which Mr. Foley has the right to acquire
beneficial ownership by virtue of outstanding options that vest within 60
days of March 16, 1998.
(7) Includes 28,728 shares with respect to which Adm. Fowler has the right to
acquire beneficial ownership by virtue of outstanding vested options and
6,500 shares with respect to which Adm. Fowler has the right to acquire
beneficial ownership by virtue of outstanding options that vest within 60
days of March 16, 1998.
(8) Includes 10,000 shares with respect to which Mr. Greaves has the right to
acquire beneficial ownership by virtue of outstanding vested options.
(9) Includes 28,728 shares with respect to which Mr. Hanselman has the right to
acquire beneficial ownership by virtue of outstanding vested options and
6,500 shares with respect to which Mr. Hanselman has the right to acquire
beneficial ownership by virtue of outstanding options that vest within 60
days of March 16, 1998.
(10) Includes 26,000 shares with respect to which Mr. Stegemeier has the right
to acquire beneficial ownership by virtue of outstanding vested options and
6,500 shares with respect to which Mr. Stegemeier has the right to acquire
beneficial ownership by virtue of outstanding options that vest within 60
days of March 16, 1998.
(11) Includes 28,728 shares with respect to which Mr. Troubh has the right to
acquire beneficial ownership by virtue of outstanding vested options and
6,500 shares with respect to which Mr. Troubh has the right to acquire
beneficial ownership by virtue of outstanding options that vest within 60
days of March 16, 1998.
(12) Includes 100,000 shares with respect to which Mr. Gellert has the right to
acquire beneficial ownership by virtue of outstanding vested options.
(13) Includes 127,000 shares with respect to which Dr. Berkbigler has the right
to acquire beneficial ownership by virtue of outstanding vested options,
373,086 shares held by Berkbigler Family Partners, Ltd., of which Dr.
Berkbigler is the general partner, and 172 shares held by Dr. Berkbigler
under the profit sharing component of the Company's 401(k) plan.
(14) Includes 65,000 shares with respect to which Mr. Southam has the right to
acquire beneficial ownership by virtue of outstanding vested options.
(15) Includes 181,999 shares with respect to which Mr. Elder has the right to
acquire beneficial ownership by virtue of outstanding vested options.
(16) Includes an aggregate of 1,367,565 shares with respect to which all current
executive officers and directors as a group have the right to acquire
beneficial ownership by virtue of outstanding vested options, and an
aggregate of 45,501 shares with respect to which all current executive
officers and directors as a group have the right to acquire beneficial
ownership by virtue of outstanding options that vest within 60 days of March
16, 1998.
32
<PAGE>
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Under the Exchange Act, the Company's directors, certain executive and other
officers, and any person holding more than ten percent of the Company's Class A
Common Stock are required to report their ownership and any changes in that
ownership to the Securities and Exchange Commission (the "SEC") and any exchange
or quotation system on which the Class A Common Stock is listed or quoted.
Specific due dates for these reports have been established and the Company is
required to report in this Proxy Statement any failure by directors, officers
and ten percent holders to file such reports on a timely basis. Based solely on
a review of the copies of reports furnished to the Company as filed with the
SEC, the Company believes that its executive officers and directors have
complied with the filing requirements applicable to them for the year ended
December 31, 1997.
REQUIREMENTS AND PROCEDURES FOR SUBMISSION OF PROXY PROPOSALS AND
NOMINATIONS OF DIRECTORS BY STOCKHOLDERS
NOMINATIONS FOR THE BOARD OF DIRECTORS
The Company expects to hold its 1999 Annual Meeting of Stockholders in May
of 1999, although the Company retains the right to change this date, as it may
determine. The By-Laws provide that written notice of proposed stockholder
nominations for the election of directors at the 1999 Annual Meeting of
Stockholders must be received by the Secretary of the Company not less than
sixty days nor more than ninety days prior to the meeting. Notice to the Company
from a stockholder who proposes to nominate a person for election as a director
must satisfy the requirements of the SEC and the By-Laws. Stockholders wishing
to nominate persons should contact the Company's Secretary at 21600 Oxnard
Street, Woodland Hills, California 91367 or 225 North Main Street, Pueblo,
Colorado 81003.
PROPOSALS
Any stockholder who intends to present a proposal to be included in the
Company's proxy materials to be considered for action at the 1999 Annual Meeting
of Stockholders must satisfy the requirements of the SEC and the proposal must
be received by the Secretary of the Company on or before December 1, 1998 for
review and consideration for inclusion in the Company's proxy statement and
proxy card relating to that meeting.
The Chairman of the Annual Meeting may decline to allow the transaction of
any business or the consideration of any nomination which was not properly
presented in accordance with these requirements. The requirements with respect
to the nomination of director candidates do not affect the deadline for
submitting stockholder proposals for inclusion in the proxy statement, nor do
they apply to questions a stockholder may wish to ask at a meeting.
UPON WRITTEN REQUEST BY ANY STOCKHOLDER, THE COMPANY WILL PROVIDE WITHOUT
CHARGE A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE COMPANY'S MOST
RECENT FISCAL YEAR, INCLUDING THE FINANCIAL STATEMENTS AND THE FINANCIAL
STATEMENT SCHEDULES REQUIRED TO BE FILED WITH THE SEC. SUCH WRITTEN REQUESTS
SHOULD BE DIRECTED TO DAVID OLSON, VICE PRESIDENT OF INVESTOR RELATIONS, 21600
OXNARD STREET, 17TH FLOOR, WOODLAND HILLS, CA 91367.
33
<PAGE>
OTHER MATTERS
The Board of Directors knows of no other business that will be presented for
consideration at the Annual Meeting. If other matters are properly brought
before the meeting, however, it is the intention of the persons named in the
accompanying proxy to vote the shares represented thereby on such matters in
accordance with their best judgment.
By Order of the Board of Directors,
/s/ B. CURTIS WESTEN, ESQ.
B. Curtis Westen, Esq.
SENIOR VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY
34
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
21600 OXNARD STREET
WOODLAND HILLS, CALIFORNIA 91367
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND
MANAGEMENT OF FOUNDATION HEALTH SYSTEMS, INC.
The undersigned does hereby appoint Malik M. Hasan, M.D., Jay M. Gellert and
B. Curtis Westen as Proxies, each with the power to appoint his substitute,
and hereby authorizes them to represent and to vote, as designated below, all
the shares of Class A Common Stock of Foundation Health Systems, Inc. (the
"Company") held of record by the undersigned on March 16, 1998 at the annual
meeting of stockholders to be held on May 7, 1998 or any adjournment or
postponement thereof.
PLEASE MARK, SIGN, DATE AND MAIL THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
- -------------------------------------------------------------------------------
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
PLEASE MARK VOTE IN OVAL IF THE FOLLOWING MANNER USING DARK INK ONLY.
IF NO DIRECTION IS MADE THIS PROXY WILL BE VOTED FOR PROPOSAL 1 AND IN THE
DIRECTION OF THE PROXIES AS TO ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE
THE ANNUAL MEETING.
FOR WITHHOLD FOR ALL
ALL ALL EXCEPT
/ / / / / /
1. ELECTION OF DIRECTORS --
Nominees: Roger F. Greaves, Richard W. Hanselman and Raymond S. Troubh.
-----------------------------------------------------------------
(EXCEPT NOMINEE(S) LISTED ABOVE)
2. To authorize the proxies to vote in their discretion upon such other
matters as may properly come before the Annual Meeting.
FOR AGAINST ABSTAIN
/ / / / / /
The undersigned acknowledges receipt of the Notice of Annual Meeting of
Stockholders to be held on May 7, 1998 and the related Proxy Statement. This
Proxy, when properly executed, will be filed in the manner directed herein by
the undersigned stockholder.
Dated:
-----------------------------, 1998
Signature(s)
------------------------------
-----------------------------------------
Please sign exactly as name appears
hereon. When shares are held jointly,
both should sign. When signing as
attorney, executor, administrator,
trustee or guardian, please give full
title as such. If a corporation, please
sign in full corporate name by President
or other authorized officer. If a
partnership, please sign in partnership
name by an authorized person.
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
YOUR VOTE IS IMPORTANT!
PLEASE MARK, SIGN AND DATE THIS PROXY AND RETURN IT PROMPTLY
IN THE ENCLOSED ENVELOPE.
