<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
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)
- --------------------------------------------------------------------------------
(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:
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(2) Aggregate number of securities to which transaction applies:
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(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):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / 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:
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(2) Form, Schedule or Registration Statement No.:
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(4) Date Filed:
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<PAGE>
[LOGO]
FOUNDATION
HEALTH
SYSTEMS,
INC.
NOTICE OF
1999 ANNUAL
MEETING
AND
PROXY
STATEMENT
April 12, 1999
Dear Stockholders:
It is a pleasure to invite you to attend the 1999 Annual Meeting of
Stockholders of Foundation Health Systems, Inc. to be held simultaneously via
the Internet at www.vcall.com and at the Warner Center Marriott, 21850 Oxnard
Street, Woodland Hills, California 91367 on Thursday, May 6, 1999, at 10:00 a.m.
(California time).
Each item of business described in the accompanying Notice of Annual Meeting
and Proxy Statement will be discussed during the meeting and stockholders who
attend in person 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 either via the Internet or on the enclosed card. Please sign, date
and return your proxy card in the envelope provided as soon as possible or
complete a proxy card over the Internet at www.harrisbank.com/ wproxy. If you do
attend the meeting in person, your proxy can be revoked at your request.
Sincerely,
[LOGO]
Jay M. Gellert
PRESIDENT AND CHIEF EXECUTIVE OFFICER
- -
<PAGE>
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Foundation Health Systems, Inc. (the "Company") will hold its 1999 Annual
Meeting of Stockholders (the "Annual Meeting") on Thursday, May 6, 1999 at 10:00
a.m. (California time) simultaneously via the Internet at www.vcall.com and at
the Warner Center Marriott, 21850 Oxnard Street, Woodland Hills, California
91367, for the following purposes:
1. To elect four directors to serve until the 2002 Annual Meeting of
Stockholders.
2. To ratify the selection of Deloitte & Touche LLP as the Company's
independent public accountants.
3. To act upon any other matters that may properly come before the meeting.
The Board of Directors has fixed Friday, March 12, 1999 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. 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,
[LOGO]
B. Curtis Westen, Esq.
SENIOR VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY
April 12, 1999
YOUR VOTE IS IMPORTANT
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING EITHER
IN PERSON OR VIA THE INTERNET. HOWEVER, TO ENSURE YOUR REPRESENTATION AT THE
ANNUAL MEETING, PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS
SOON AS POSSIBLE IN THE ENCLOSED SELF-ADDRESSED, POSTAGE-PAID ENVELOPE OR,
ALTERNATIVELY, FILL OUT THE PROXY CARD OVER THE INTERNET AT
WWW.HARRISBANK.COM/WPROXY. IF YOU ATTEND THE ANNUAL MEETING IN PERSON, YOU MAY
VOTE AT THE MEETING EVEN IF YOU HAVE PREVIOUSLY 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 1999 Annual Meeting of
Stockholders of the Company (the "Annual Meeting") to be held on Thursday, May
6, 1999 at 10:00 a.m. (PDT) simultaneously via the Internet at www.vcall.com and
at the Warner Center Marriott, 21850 Oxnard Street, Woodland Hills, California
91367, and at any adjournments or postponements thereof. This Proxy Statement
and accompanying proxy card will be mailed beginning on or about April 12, 1999
to give holders of Class A Common Stock, par value $.001 per share ("Class A
Common Stock"), of the Company of record on March 12, 1999 (the "Record Date")
an opportunity to vote at the Annual Meeting.
The Annual Meeting will be held simultaneously via the Internet and in
person. Participation at the Annual Meeting via the Internet will consist of
live sound and real-time access to printed material. To attend the Annual
Meeting via the Internet, a stockholder should log-on to www.vcall.com on
Thursday, May 6, 1999 and follow the instructions provided at the site.
Stockholders will NOT be permitted to vote over the Internet during 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 shares of 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. Attendance at the
Annual Meeting over the Internet will not be counted for purposes of determining
the presence or absence of a quorum to transact business at the Annual Meeting.
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 or, alternatively, by completing a proxy card over the
Internet at www.harrisbank.com/wproxy before 5:00 p.m. (CDT) on May 4, 1999.
VOTING OVER THE INTERNET WILL NOT BE PERMITTED AFTER 5:00 P.M. (CDT) ON TUESDAY,
MAY 4, 1999. If no directions are given and either the signed card is returned
or the Internet proxy card is submitted, then the proxy holders will vote the
shares for the election of all listed nominees, in accordance with the
directors' recommendations on the other subjects listed on the proxy card, 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.
Instructions on how to submit a proxy via the Internet are located on the
attachment to the proxy card included with this Proxy Statement. The Internet
voting procedures are designed to authenticate stockholders of the Company by
use of a Control Number located on the attachment to the proxy card included
herewith. If you hold your shares through a bank, broker or other holder of
record, check the information provided by that entity to determine which voting
options are available to you. Please be aware that any
3
<PAGE>
costs related to voting over the Internet, such as Internet access charges and
telecommunications costs, will be your responsibility.
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 submitting it
electronically via the Internet at www.harrisbank.com/wproxy before 5:00 p.m.
(CDT) on May 4, 1999, or by attending the Annual Meeting in person and voting
such shares during the Annual Meeting. 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 at 21650 Oxnard Street, Woodland
Hills, California 91367 or if a subsequently dated proxy is submitted
electronically, it should be sent via the Internet before 5:00 p.m. (CDT) on May
4, 1999 using the web site at www.harrisbank.com/wproxy.
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 117,200,785 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 5,047,642 shares of Class B Common Stock,
all of which 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 A PROXY CARD (OR FILL OUT THE INTERNET
PROXY) 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, 1999.
4
<PAGE>
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 5.8 million
individuals in 21 states through group, individual, Medicare risk, Medicaid, and
Civilian Health and Medical Program of the Uniformed Services ("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") involving the Company (then named Health Systems
International, Inc. ("HSI")) and Foundation Health Corporation ("FHC") which was
consummated on April 1, 1997.
PROPOSAL 1--ELECTION OF DIRECTORS
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, three
directors designated in Class I and three directors designated in Class II. At
the Annual Meeting, stockholders will elect four directors for Class III. One
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 By-Laws.
The Class III nominees are J. Thomas Bouchard, Thomas T. Farley, Patrick
Foley and Richard J. Stegemeier. Each Class III director will be elected for a
three-year term and will hold office until the 2002 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 provide that the persons receiving a plurality of the votes
cast, up to the number of directors to be elected, shall be elected.
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.
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 contain certain transitionary
provisions applicable to the Board of Directors until April 1, 2002 (the
"Transition Period"). During the Transition Period the Company's Board of
Directors is to consist of certain persons appointed at the time of the FHS
Combination by FHC or subsequently by such FHC appointees (collectively, the
"FHC Designees"), and certain persons appointed at the time of the FHS
Combination by HSI or subsequently by such HSI appointees (collectively, the
"HSI Designees"). Such provisions also address the size of the Board of
Directors and certain other matters, and may be overridden by the affirmative
vote of at least eight members of the Board of Directors.
5
<PAGE>
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 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.
In February 1999, the Board of Directors elected Jay M. Gellert, the
Company's President and Chief Executive Officer, to fill a vacancy in Class I of
the Board of Directors. Effective March 1, 1999, Dr. Hasan, a director in Class
I, resigned from the Company's Board of Directors in connection with his
retirement; as a result, there currently exists one vacancy in Class I. The
Board of Directors is currently in the process of recruiting an appropriate
replacement director to fill the vacancy pursuant to and in accordance with the
Company's By-Laws.
The nominees were designated for election, pursuant to the By-Laws, by the
Committee on Directors of the Board of Directors of the Company. 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 II whose terms continue after the Annual
Meeting:
NOMINEES
<TABLE>
<CAPTION>
TERM TO
NAME PRINCIPAL OCCUPATION OR EMPLOYMENT AGE EXPIRE
- -------------------------------- ---------------------------------------------------------------- --- -----------
<S> <C> <C> <C>
CLASS III
J. Thomas Bouchard.............. Senior Vice President, Human Resources of International Business
Machines Corporation 58 2002
Thomas T. Farley................ Senior Partner of Petersen, Fonda, Farley, Mattoon, Crockenberg
and Garcia, P.C. 64 2002
Patrick Foley................... Chairman, President and Chief Executive Officer of DHL Airways,
Inc. 67 2002
Richard J. Stegemeier........... Chairman Emeritus of the Board of Directors of Unocal
Corporation 70 2002
</TABLE>
CONTINUING DIRECTORS
<TABLE>
<CAPTION>
TERM TO
NAME PRINCIPAL OCCUPATION OR EMPLOYMENT AGE EXPIRE
- -------------------------------- ---------------------------------------------------------------- --- -----------
<S> <C> <C> <C>
CLASS I
Gov. George Deukmejian.......... Partner of Sidley & Austin and former Governor of the State of
California 70 2000
Adm. Earl B. Fowler............. President and owner of Fowler International Corporation 73 2000
Jay M. Gellert.................. President and Chief Executive Officer of the Company 45 2000
CLASS II
Richard W. Hanselman............ Director and Consultant to various companies 71 2001
Raymond S. Troubh............... Financial Consultant to and Director of various companies 72 2001
Roger F. Greaves................ Former Co-Chairman of the Board of Directors, Co-President and
Co-Chief Executive Officer of the Company and Director of
various companies 61 2001
</TABLE>
6
<PAGE>
INFORMATION CONCERNING CURRENT MEMBERS OF THE BOARD OF DIRECTORS AND NOMINEES
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, Inc.
("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 Corporation, a railroad company, since September
1995, and was a director of one of its predecessors, Santa Fe 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., 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 to 1997 and has been a director/advisor of Norwest Banks of
Pueblo and Sunset since 1985. Mr. Farley is an emeritus member of the Board of
Regents of Santa Clara University, a Jesuit institution, and a director of
Colorado Public Radio.
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, Glenborough Realty Trust, Del Monte Foods 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, and a director of NV Marketing
Group, a life insurance marketing company. 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.
MR. GELLERT was elected to the Board of Directors of the Company in February
1999. He became President and Chief Executive Officer of the Company in August
1998. Previously Mr. Gellert served as President and Chief Operating Officer of
the Company from May 1997 until August 1998. From April 1997 to May 1997, Mr.
Gellert served as Executive Vice President and Chief Operating Officer of the
Company. Mr. Gellert served as President and Chief Operating Officer of HSI from
June 1996 until March 1997. He served on the Board of Directors of HSI from June
1996 to April 1997. Prior to joining HSI, Mr. Gellert directed Shattuck Hammond
Partners Inc.'s strategic advisory engagements in the area of integrated
7
<PAGE>
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, he
was Senior Vice President and Chief Operating Officer for California Healthcare
System. Mr. Gellert serves on the Board of Directors of Paragon Health Network,
Inc.
MR. GREAVES became a director of the Company in April 1997 upon consummation
of the FHS Combination. Mr. Greaves served as a director of HSI from January
1994 until the FHS Combination. He 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 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 a director of Arvin
Industries, Becton, Dickinson and Company, the Bradford Funds, and chairman of a
small privately-held company.
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 Halliburton Company, Northrop Grumman
Corporation, Sempra Energy and Montgomery Watson, Inc.
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 ARIAD Pharmaceuticals, Inc., Becton, Dickinson and Company, Diamond
Offshore Drilling, Inc., General American Investors Company, Olsten Corporation,
Starwood Hotels and Resorts, 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, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- ---------------------------------------------------------------------------
<S> <C> <C>
Malik M. Hasan, M.D............ 60 Former Chairman of the Board of Directors
Jay M. Gellert................. 45 President and Chief Executive Officer
Dale T. Berkbigler, M.D........ 50 Executive Vice President of Medical Affairs and Chief Medical Officer
J. Robert Bruce................ 50 President of FHS Central Division
Maurice Costa.................. 51 President of FHS Workers' Compensation Services Division
Karen A. Coughlin.............. 51 President of FHS Northeast Division
Steven P. Erwin................ 55 Executive Vice President and Chief Financial Officer
Karin D. Mayhew................ 48 Senior Vice President Human Resources
Edward J. Munno................ 56 President of FHS Arizona Division
Cora Tellez.................... 49 President of FHS California Division
Dale Terrell................... 58 Senior Vice President and Chief Technology Officer
Gary S. Velasquez.............. 39 President of FHS Specialty Services and Government Operations Division
B. Curtis Westen, Esq.......... 38 Senior Vice President, General Counsel and Secretary
Robert Natt.................... 50 Former President of FHS Northeast Division
</TABLE>
DR. HASAN served as Chairman of the Board of Directors from May 1997 until
March 1999. Previously, he served as Chief Executive Officer of FHS from
consummation of the FHS Combination until August 1998, when he retired from such
position. From consummation of the FHS Combination until May 1997, Dr. Hasan
also served as 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 also served as a director of the Company from January 1994 until
March 1999. Dr. Hasan served as Chairman of the Board of Directors of QualMed (a
predecessor to the Company) from its formation in 1985 until his retirement in
August 1998. Dr. Hasan assumed the additional position of Chief Executive
Officer of QualMed in 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. GELLERT became President and Chief Executive Officer of the Company in
August 1998. Previously, Mr. Gellert served as President and Chief Operating
Officer of the Company from May 1997 until August 1998. From April 1997 to May
1997, Mr. Gellert served as Executive Vice President and Chief Operating Officer
of the Company. Mr. Gellert served as President and Chief Operating Officer of
HSI from June 1996 until March 1997. He served on the Board of Directors of HSI
from June 1996 to April 1997. Mr. Gellert has been a director of the Company
since March 1999. Prior to joining HSI, 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
9
<PAGE>
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 serves on
the Board of Directors of Paragon Health Network, Inc.
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 HSI 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 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. BRUCE has served as President and Chief Executive Officer of the
Company's Central Division since June 1998. From 1996 until June 1998, he served
as President of QualMed Plans for Health, Inc., a subsidiary of the Company
headquartered in Philadelphia, Pennsylvania. From 1994 to 1996, Mr. Bruce served
as Executive Director of QualMed Plans for Health of Colorado, Inc., a
subsidiary of the Company headquartered in Denver, Colorado. From 1992 to 1994,
he served as a regional Executive Director of Health Net, a subsidiary of the
Company. From 1991 to 1992, Mr. Bruce served as Director of Sales and Marketing
of PCA Health Plan, which merged into Health Net. From 1990 to 1991, he served
as Director of Group Sales for Foundation Health Plans, headquartered in
Sacramento, California. Prior thereto, Mr. Bruce served as Senior Sales
Executive for Blue Shield of California (1989-90); Vice President, Sales of
Occupational Urgent Care Health Systems, Inc. (1988-89); Senior Vice President,
Marketing of Blue Cross and Blue Shield of Colorado (1986-88); and as a
Director, Southwestern Regional Marketing Office of the national Blue Cross and
Blue Shield Association (1983-84).
MR. COSTA has served as President of FHS' Workers' Compensation Services
Division since December 1998. From April 1997 until December 1998, he served as
President of FHS' Workers' Compensation Division. Previously, Mr. Costa was a
founder of Business Insurance Corporation ("BIC"), and he played a significant
role in its acquisition of California Compensation Insurance Company in 1988 and
its ultimate sale to FHC in August 1993.
MS. COUGHLIN has served as President and Chief Executive Officer of the
Northeast Division of the Company since October 1998. From 1992 until 1998, she
served as President of one of the two operating divisions of Humana, Inc.
("Humana"), a leading national health care company. Prior thereto, Ms. Coughlin
served as Vice President and General Manager of Humana in Chicago, Illinois, and
before that she served as a Vice President of Humana Health Plans of Kentucky.
Currently she serves on the boards of several organizations, including The
Governor of Connecticut's Council on Economic Competitiveness and Technology,
NeuroSource, Inc., Community Physicians Network, Inc. and Today's Chicago Woman
Foundation.
MR. ERWIN became Executive Vice President and Chief Financial Officer of the
Company in March 1998. From 1994 until 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. Bancorp was acquired by
First Bank System in 1997. From 1987 to 1994, Mr. Erwin served as Treasurer of
Boston-based BayBanks, Inc. BayBanks was a 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
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technology company. Summit is a leading supplier of software tools designed to
solve the integrated circuit engineering problems caused by increasing chip
complexity.
MS. MAYHEW became Senior Vice President Human Resources of the Company in
April 1999. Prior to joining the Company, she served as Senior Vice President
Organization Development of Southern New England Telecommunications Company
("SNET"), a northeast regional information, entertainment and telecommunications
company based in Connecticut. SNET was acquired by SBC Communications, Inc. in
October 1998. Prior thereto, Ms. Mayhew served in various capacities at SNET,
including Vice President Human Resources, since 1972.
MR. MUNNO has served as President and Chief Operating Officer of the
Company's Arizona Division since June 1998. Previously, he served as President
and Chief Operating Officer of the Company's Arizona operations from January
1995 until June 1998 (both before and after the Company's acquisition of FHC).
Prior thereto, Mr. Munno served as President and Chief Operating Officer of
FHC's Specialty Services Group. Mr. Munno joined FHC in 1991 as Vice President
of Sales and was promoted to Senior Vice President and Chief Marketing Officer
in 1992. Prior to joining FHC, he served as Vice President of the Insurance
Products Division of Equicor Inc. ("Equicor"), a national employee benefits
company based in Nashville, Tennessee.
MR. NATT was President of FHS Northeast Division from January 1998 until
October 1998, from which time he served in an executive capacity until December
31, 1998 to assist in the transition of such position to Karen Coughlin.
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.
MS. TELLEZ has served as President of the Company's California Division
since November 16, 1998. Formerly, she served as President and Chair of
Prudential Healthcare Plan of California, Inc., responsible for operations in
California, Colorado and Arizona. Prior to joining Prudential in 1997, Ms.
Tellez served as Senior Vice President and regional Chief Executive Officer of
Blue Shield of California. Ms. Tellez began her career in health care in 1978
with Kaiser Foundation Health Plan, where she held several executive positions
during her sixteen year tenure culminating with serving as Vice President and
Regional Manager of the Hawaii Plan. Currently, Ms. Tellez serves as a member of
the Board of Directors of several organizations, including Golden State Bancorp
Inc., Institute for Medical Quality, California Association of Health Plans,
Holy Names College, Asian Community Mental Health Services and The Institute for
the Future, in Menlo Park, California.
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. 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 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 Chief
Operating Officer of Specialty Services for FHC. Prior to joining FHC, Mr.
Velasquez served as Chief Financial Officer/General Manager
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<PAGE>
of Managed Health Network (now a FHS subsidiary). He also served as Vice
President, Controller of Equicor.
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 April 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 until August
1993. From September 1986 until March 1992, Mr. Westen was an attorney with the
firm of Lord, Bissell & Brook in Chicago, Illinois.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following information relates to transactions during 1998 by the Company
with certain directors and executive officers of the Company.
Mr. Bouchard, a director of the Company, is Senior Vice President, Human
Resources of International Business Machines Corporation ("IBM"). During 1998,
the Company and its subsidiaries engaged IBM as a consultant with respect year
2000 and other issues. During 1998, the Company paid to IBM approximately $8.0
million in consulting fees.
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 $1.0 million in fees for legal services rendered to the
Company and certain of its subsidiaries in 1998.
Since January 1, 1998, each of the following executive officers of the
Company received one-time loans from the Company in the amounts indicated in
connection with their hire or relocation: Cora Tellez ($400,000), Karen Coughlin
($100,000), Steven Erwin ($125,000), Karin Mayhew ($300,000) and B. Curtis
Westen ($250,000). The loans accrue interest at the Prime Rate and each is
payable upon demand by the Company in the event of a voluntary termination of
employment of the respective officer or termination for Cause (as defined in
their respective employment agreements). The principal and interest of the loans
will be forgiven by the Company at varying times between one and five years
after the date of hire or relocation of the respective officers. A loan will be
forgiven prior to such time in the event the respective officer's employment is
terminated involuntarily without Cause, voluntarily due to Good Reason following
a Change of Control (each as defined in their respective employment agreements),
or due to death or disability. As of April 1, 1999, the full amount of principal
and interest under each of the loans was outstanding, except for the loan to
Steven Erwin which has been forgiven in full.
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 HSI
Combination 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.
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<PAGE>
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 CWF and certain stockholders of HN Management Holdings,
Inc., a predecessor to the Company ("HNMH"), named therein, the CWF was subject
to various volume and manner of sale restrictions specified in the CWF
Shareholder Agreement which limited the number of shares of Class B Common Stock
that the CWF could dispose of prior to December 31, 1998.
Pursuant to certain agreements with the CWF, the Company redeemed 4,550,000
shares of Class B Common Stock from the CWF on June 27, 1997. The CWF has also
sold shares of Class B Common Stock to unrelated third parties, which shares of
common stock automatically converted into shares of Class A Common Stock at the
time of such sales.
On February 25, 1998, the CWF notified the Company of its intention to sell
up to 8,026,000 shares of Class B Common Stock pursuant to the Registration
Rights Agreement between the Company and the CWF dated March 2, 1995 (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. Pursuant to the
terms of a letter agreement dated June 1, 1998 between the CWF and the Company
(the "Letter Agreement"), the Company provided its consent under the CWF
Registration Rights Agreement to permit the CWF to sell certain shares of Class
B Common Stock in private sales transactions (subject to the terms and
conditions set forth in the Letter Agreement) in lieu of such underwritten
public offering. Effective June 18, 1998, the CWF sold 5,250,000 shares of Class
B Common Stock to unrelated third parties in accordance with the Letter
Agreement, which shares of Class B Common Stock sold by the CWF automatically
converted on a one-for-one basis into shares of Class A Common Stock. Pursuant
to the terms of the Letter Agreement, all of such 5,250,000 shares sold reduced
the number of shares subject to registration under the CWF Registration Rights
Agreement on a one-for-one basis. As a result of such sales, the CWF currently
holds 5,047,642 shares of Class B Common Stock. As of December 31, 1998,
approximately $17,646,000 in principal amount remained outstanding under the CWF
Notes.
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.
The Company's Board of Directors met a total of nine times in 1998. Each
member of the Board of Directors of the Company was present for 75% or more of
the total number of meetings of such Board of Directors and of all committees of
such Board of Directors in 1998 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, and the Finance Committee will consist of an equal number of
FHC Designees and HSI 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 each of the Compensation Committee and the
Finance Committee will be selected from the HSI Designees. Following the
Transition Period, a majority of the Board of Directors will select the
directors to serve on
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<PAGE>
the committees of the Board of Directors. In addition to the foregoing
committees, in 1998 the Board of Directors established an Advisory Committee
comprised of two FHC Designees and two HSI Designees.
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 Company's Audit Committee held eleven meetings in 1998.
COMMITTEE ON DIRECTORS. 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 four
Class III directors, all of whose current terms expire at the Annual Meeting.
Stockholders who wish to propose nominations for directors for consideration at
the 2000 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 Company's Committee on Directors held three
meetings in 1998.
COMPENSATION AND STOCK OPTION COMMITTEE. The Compensation Committee
currently consists of Messrs. Bouchard (Chairman), Farley, Hanselman and Troubh.
Each of the current members is an "outside director" as such term is defined in
Section 162(m) of the Internal Revenue Code of 1986, as amended (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
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<PAGE>
requested, on any compensation matter. In 1998, the Company's Compensation
Committee held nineteen meetings.
FINANCE COMMITTEE. The Finance Committee of the Board of Directors of the
Company currently consists of Messrs. Greaves, Hanselman and Troubh. During
1998, and until retirement from the Board of Directors in March of 1999, Dr.
Hasan was also a member (and chairman) of the Finance Committee. 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 officials of the Company with respect
to mergers and acquisitions transactions, divestiture 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 1998.
ADVISORY COMMITTEE. The Advisory Committee of the Board of Directors
currently consists of Messrs. Deukmejian, Foley, Greaves and Hanselman. This
committee's responsibilities include consulting with the Chief Executive Officer
on Company operations and organizational initiatives; monitoring the areas of
Company performance, personnel evaluation and recruitment; and providing counsel
on other matters as requested by the Chief Executive Officer. The Company's
Advisory Committee held three meetings in 1998.
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<PAGE>
REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEE ON
EXECUTIVE COMPENSATION FOR FISCAL YEAR 1998
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 1998. 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").
In 1998, the Compensation Committee was compromised of four "outside
directors" (within the meaning of Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code")): 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, 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.
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 a comprehensive
analysis of pay practices of a group of eight publicly traded healthcare
organizations with annual revenues ranging from $4.2 billion to $18.8 billion.
These companies comprise 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. In this way, the Compensation Committee seeks to
have a significant portion of annual compensation at risk. The Compensation
Committee used stock options in 1998 to directly align executive's long-term
financial interests with the stockholders and advance the interests of the
Company by attracting and retaining talented executives. 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 stock options as the primary element of long-term compensation for the
Company's executive officers.
The options granted in 1998 provide for termination of the options and a
"clawback" of realized gains if the executive joins a competitor of the Company
within six months after termination of employment, and the options also include
a provision prohibiting any activities competitive to the Company for a period
of up to twelve months post-termination.
BASE SALARY
During 1998, 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
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<PAGE>
and QualMed, Inc. that formed Health Systems International, Inc. ("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 merger transaction involving HSI and Foundation Health Corporation that
was consummated on April 1, 1997. In connection with Dr. Hasan's retirement in
August 1998, the Company entered into an Early Retirement Agreement with Dr.
Hasan. Mr. Gellert's base salary was increased to $500,000 in August 1997 upon
his promotion to President and Chief Operating Officer of the Company. When Mr.
Gellert was promoted to President and Chief Executive Officer of the Company in
August 1998, his annual base salary remained the same. Mr. Gellert's current
annual base salary of $500,000 is well below the 25(th) percentile of the
selected peer group. The base salary of each of Messrs. Velasquez and Costa
reflects the base salary established for certain executive officers of the
Company based on the compensation analysis referenced above prepared by the
Company's independent consultants. Finally, Mr. Natt's base salary was set in
his employment agreement with the Company which was negotiated at the time of
the Company's acquisition of Physicians Health Services, Inc. in December of
1997.
ANNUAL CASH BONUS
Pursuant to the Company's Performance-Based Annual Bonus Plan (the "Bonus
Plan") applicable for 1998 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, a cash bonus pool in the amount of $7.5 million is
established, provided that the annual performance goal of more than $250 million
of consolidated income from operations before taxes is achieved. Under the Bonus
Plan, such consolidated income is to be determined under generally accepted
accounting principles consistently applied, excluding any nonrecurring or
extraordinary charges. 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 the Bonus
Plan.
The performance goal of $250 million in consolidated income from operations
before taxes under the Bonus Plan was not met for 1998. As a result, no bonuses
were paid under the Bonus Plan for 1998.
STOCK OPTIONS
During 1998, the Company granted stock options to the Chief Executive
Officer and certain of the other Named Executive Officers. 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, internal equity and each individual executive's
position and potential for helping the Company to achieve its long-term
objectives. All of such options were granted on December 4, 1998 under the
Company's 1997 Stock Option Plan at an exercise price of $12.9375 per share,
which was the fair market value of FHS common stock on such date. All of such
options vest 100% four and one-half years following the date of grant, and
vesting is accelerated if the stock closes at or above $25 per share for 20
consecutive trading days. All of such options have a five-year term and are
subject to other standard terms and conditions. As referenced above, all of such
options provide for a "clawback" of realized gains if the executive resigns and
joins a competitor within six months of termination of employment.
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The Company has also provided benefits for the Named Executive Officers and
other senior executives in the event of a change in control. The Named Executive
Officers would receive three times base salary plus continued health and welfare
benefit coverage for three years if involuntarily terminated (or constructively
terminated) within two years after a change in control. Mr. Gellert's change in
control benefits equal three times base salary and target bonus. In addition,
vesting of stock options accelerates upon a change in control pursuant to the
terms of the Company's stock option plan. Change in control benefits are subject
to reduction to the extent such reduction would improve the executive's
after-tax position by eliminating any excise taxes otherwise imposed on the
employee under the parachute payment provisions of the Code. In the event of Mr.
Gellert's involuntary termination other than for cause or because of a change in
control, he would receive severance benefits equal to three times base salary,
one year of target bonus and a two-year consulting agreement with payment equal
to twice his target bonus. Under the Company's standard Severance Payment
Agreement, terminated executives are precluded from competing with the Company
for a period of up to one year post-termination, depending on the applicable
circumstances. Mr. Gellert would also be precluded from competing with the
Company for a period of one year post-termination.
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
Richard W. Hanselman
Thomas T. Farley
Raymond S. Troubh
Dated: March 31, 1999
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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 the Class A Common Stock) to December 31, 1994, 1995, 1996,
1997 and 1998. 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., 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, 1998
<TABLE>
<CAPTION>
FOUNDATION HEALTH S&P 500 SELECTED
SYSTEMS, INC. INDEX PEER GROUP
------------------- ----------- -------------
<S> <C> <C> <C>
January 31, 1994....................................................... $ 100 $ 100 $ 100
December 31, 1994...................................................... $ 147 $ 98 $ 97
December 31, 1995...................................................... $ 156 $ 134 $ 136
December 31, 1996...................................................... $ 120 $ 165 $ 142
December 31, 1997...................................................... $ 107 $ 219 $ 123
December 31, 1998...................................................... $ 58 $ 284 $ 120
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
FOUNDATION HEALTH S&P 500 SELECTED
<S> <C> <C> <C>
SYSTEMS, INC. INDEX PEER GROUP
January 31, 1994 $100 $100 $100
December 31, 1994 $147 $98 $97
December 31, 1995 $156 $134 $136
December 31, 1996 $120 $165 $142
December 31, 1997 $107 $219 $123
December 31, 1998 $58 $284 $120
</TABLE>
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EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following tables and descriptive materials set forth separately, for the
fiscal years indicated, each component of compensation paid or awarded to, or
earned by, (i) Dr. Hasan and Mr. Gellert, each the Chief Executive Officer of
the Company during a portion of 1998, and (ii) each of the four other most
highly compensated executive officers of the Company serving as of the end of
the 1998 calendar year (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
----------------------------
AWARDS
------------- PAYOUTS
ANNUAL COMPENSATION SECURITIES -------------
-------------------- UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) OPTIONS/ PAYOUTS COMPENSATION
WITH THE COMPANY IN 1998 YEAR (1) BONUS ($) SARS(#) ($) ($)
- -------------------------------------------- --------- --------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Malik M. Hasan, M.D......................... 1998 848,831 793,000(2) 0 0 3,935,464(3)
Former Chairman of the Board of 1997 983,100 0 850,000 0 34,757(4)
Directors and Chief Executive Officer 1996 937,417 800,000 300,000 0 843,334(5)
Jay M. Gellert.............................. 1998 500,000 0 500,000 0 894(6)
1997 450,000 0 600,000 0 866(7)
President and Chief Executive Officer 1996 247,917(8) 0 100,000 0 3,278(9)
Dale T. Berkbigler, M.D..................... 1998 412,776 0 200,000 0 5,738(10)
Executive Vice President and Chief 1997 385,200 0 175,000 0 4,336(11)
Medical Officer 1996 360,000 0 92,000 0 2,633(12)
Gary S. Velasquez........................... 1998 350,000 0 200,000 0 5,426(13)
President of FHS Specialty Services and 1997 316,347 0 175,000 0 5,317(14)
Government Operations Division 1996 272,502 135,000 26,000 0 3,646(15)
Maurice Costa............................... 1998 350,000 125,000 0 0 34,585(16)
President of FHS Workers' Compensation 1997 350,000 0 175,000 0 36,071(17)
Services Division 1996 320,579 430,000 26,000 0 35,061(18)
Robert Natt(19)............................. 1998 320,000 250,000 0 0 2,362(20)
Former President of FHS Northeast 1997 330,417 170,406 150,000 0 409(21)
Division 1996 260,000 136,175 0 0 2,308(22)
</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.
(2) Represents a pro-rata portion of Dr. Hasan's 1998 target bonus which was
paid pursuant to the terms of the Early Retirement Agreement entered into
with the Company in connection with his retirement in August of 1998.
(3) This amount includes an aggregate of $3,915,000 paid to Dr. Hasan pursuant
to the Early Retirement Agreement entered into with the Company in
connection with his retirement in August of 1998. In addition, this amount
includes $4,800 in matching contributions under the Company's 401(k) Plan
and $1,411 in premiums paid by the Company on a life insurance policy. This
amount does not include payments received by Dr. Hasan under the Company's
current SERP after his retirement from the Company or the value of the
accounts transferred to Dr. Hasan under his deferred
20
<PAGE>
compensation arrangement with the Company or the Company's old SERP in
connection with his retirement from the Company.
(4) 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.
(5) 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.
(6) Represents premiums paid by the Company on a life insurance policy.
(7) Represents premiums paid by the Company on a life insurance policy.
(8) Mr. Gellert joined the Company as an officer in June 1996 and this base
salary therefore represents only the seven months of 1996 during which he
was so employed.
(9) Represents premiums paid by the Company on a life insurance policy.
(10) This amount includes $5,000 in matching contributions under the Company's
401(k) Plan and $738 in premiums paid by the Company on a life insurance
policy.
(11) 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.
(12) 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.
(13) This amount includes $4,800 in matching contributions under the Company's
401(k) Plan and $626 in premiums paid by the Company on a life insurance
policy.
(14) This amount includes $4,750 in matching contributions under the Company's
401(k) Plan and $567 in premiums paid by the Company on a life insurance
policy.
(15) This amount includes $3,538 in matching contributions under the Company's
401(k) Plan and $108 in premiums paid by the Company on a life insurance
policy.
(16) This amount includes $4,000 in matching contributions under the Company's
401(k) Plan, $29,959 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 Mr. Costa under a split dollar life insurance program and $626
in premiums paid by the Company on a life insurance policy.
(17) This amount includes $3,964 in matching contributions under the Company's
401(k) Plan, $31,481 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 Mr. Costa under a split dollar life insurance program and $626
in premiums paid by the Company on a life insurance policy.
(18) This amount includes $3,580 in matching contributions under the Company's
401(k) Plan, $31,373 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 Mr. Costa under a split dollar life insurance program and $108
in premiums paid by the Company on a life insurance policy.
(19) Mr. Natt became an officer of the Company on December 31, 1997 in
connection with the Company's acquisition of Physicians Health Services,
Inc. All items of compensation included for periods prior to December 31,
1997 represent compensation paid by Physician's Health Services, Inc.
21
<PAGE>
(20) Represents $535 in premiums paid by the Company on a life insurance policy
and $1,727 in premiums paid by the Company on an excess disability
insurance policy.
(21) Represents premiums paid by the Company on a life insurance policy.
(22) Represents $409 in premiums paid by the Company on a life insurance policy
and $1,899 in premiums paid by the Company on an excess disability
insurance policy.
22
<PAGE>
OPTION GRANTS IN 1998
The following table summarizes option grants in 1998 to the Named Executive
Officers of the Company.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
NUMBER OF
SECURITIES % OF TOTAL AT ASSUMED ANNUAL RATES OF
UNDERLYING OPTIONS/SARS EXERCISE OR STOCK PRICE APPRECIATION
OPTIONS/SARS GRANTED TO BASE PRICE FOR OPTION TERM(B)
GRANTED EMPLOYEES IN (A) EXPIRATION --------------------------
NAME (#) (A) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ---------------------------------------- ------------- ----------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Malik M. Hasan, M.D..................... 0 0% N/A N/A $ 0 $ 0
Jay M. Gellert.......................... 500,000 6.2% $ 12.9375 12/4/03 $ 1,787,196 $ 3,949,237
Dale T. Berkbigler, M.D................. 200,000(c) 2.5% $ 12.9375 12/4/03 $ 714,879 $ 1,579,695
Gary S. Velasquez....................... 200,000 2.5% $ 12.9375 12/4/03 $ 714,879 $ 1,579,695
Maurice Costa........................... 0 0% N/A N/A $ 0 $ 0
Robert Natt............................. 0 0% N/A N/A $ 0 $ 0
</TABLE>
- ------------------------
(a) All options granted in 1998 to the Named Executive Officers were
non-qualified stock options granted pursuant to the Company's 1997 Stock
Option Plan. All such grants provide for vesting of 100% of the options on
the date four and one-half years after the date of grant (June 4, 2003), and
have a five year term. All 1998 grants to the Named Executive Officers were
at an exercise price equal to the closing sales 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) The option grant evidencing these options was expressly conditioned upon the
Company and Dr. Berkbigler agreeing to certain amendments to his employment
agreement with the Company. Because such amendments are still under
negotiation, effectiveness of the option grant is still pending.
23
<PAGE>
OPTION EXERCISES IN 1998
The following table summarizes the number and value of options exercised
during 1998, as well as the number and value of unexercised options as of
December 31, 1998, 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 VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS/AS OF OPTIONS/SARS AS OF
ACQUIRED ON VALUE DECEMBER 31, 1998(A) DECEMBER 31, 1998(B)
EXERCISE REALIZED ---------------------------- ----------------------------------
NAME (#) ($) EXERCISABLE(C) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------- ----------- ----------- ------------- ------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Malik M. Hasan, M.D................... 40,000(d) $ 670,000 663,332 836,668 $ 0 $ 0
Jay M. Gellert........................ 0 $ 0 200,000 1,000,000 $ 0 $ 0
Dale T. Berkbigler, M.D............... 15,000 $ 175,625 108,999 383,001(e) $ 0 $ 0
Gary S. Velasquez..................... 0 $ 0 99,933 316,667 $ 0 $ 0
Maurice Costa......................... 0 $ 0 130,916 125,334 $ 0 $ 0
Robert Natt........................... 0 $ 0 150,000 0 $ 0 $ 0
</TABLE>
- ------------------------
(a) The exercise price of outstanding options at December 31, 1998 ranges from
$12.9375 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, and all
other options held by Dr. Hasan 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 $11.875 of Class A
Common Stock on the NYSE on December 31, 1998 (the last trading day in 1998)
and the option exercise price.
(c) Under the terms of the Company's Second Amended and Restated 1991 Stock
Option Plan, all outstanding options on October 1, 1996 of Dr. Hasan, Mr.
Gellert and Dr. Berkbigler became exercisable on October 1, 1996 as a result
of approval by the Board of Directors of the FHS Combination. Under the
terms of the employment agreement between each of Mr. Velasquez and Mr.
Costa and FHC, options granted to Mr. Velasquez and Mr. Costa under the FHC
1990 Stock Option Plan and outstanding as of such date became exercisable on
April 1, 1997 upon consummation of the FHS Combination.
(d) An aggregate of 16,797 shares otherwise issuable were withheld from the
exercise by Dr. Hasan of nonqualified stock options to purchase 40,000 of
the Company's Class A Common Stock at an exercise price of $12.125 per share
(which exercise price was equal to the fair market value of the underlying
shares on the date of grant) to satisfy exercise price and tax withholding
obligations, with the result that 23,203 net shares of Class A Common Stock
were issued to Dr. Hasan in the exercise.
(e) Includes options to purchase 200,000 shares of Class A Common Stock, which
options are expressly conditioned upon the Company and Dr. Berkbigler
agreeing to certain amendments to his employment agreement with the Company.
Because such amendments are still under negotiation, effectiveness of such
option grant is still pending.
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. A new SERP was approved by HSI effective January 1,
1996. 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, 1998 under this program for the Named Executive Officers other than
Dr. Hasan are: Dr. Berkbigler, $6,788; Mr. Gellert, $2,122; Mr. Velasquez, $0;
Mr. Costa, $0; and Mr. Natt, $0. As part of his Early Retirement Agreement with
the Company described below, Dr. Hasan commenced receiving benefits in the
amount of $47,433 per month under the new SERP.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
EMPLOYMENT AGREEMENT WITH DR. HASAN. On March 10, 1997, in connection with
the FHS Combination, the Company entered into an amended and restated employment
letter agreement with Dr. Hasan effective as of January 1, 1997 (the "Hasan
Agreement"). The Hasan Agreement had a five-year term beginning on the Effective
Date, with an automatic one-year extension on each anniversary of the agreement.
The Hasan Agreement provided for a three-year stay bonus to be paid for the
fiscal years ending 1997, 1998 and 1999. The stay bonus was subject to certain
performance objectives as set forth in the Hasan Agreement.
If the Company terminated the employment of Dr. Hasan without "cause" or if
Dr. Hasan terminated his employment for "good reason" (each as defined in the
Hasan Agreement), during the period commencing on the effective date of such
termination and ending 36 months after the date of such termination, the Company
would pay to Dr. Hasan his base salary and an amount equal to his average annual
bonus for the preceding three years, and continue his medical, health and
accident insurance at the same coverage level maintained for his benefit
immediately prior to the date of termination.
On August 6, 1998, the Company and Dr. Hasan entered into an Early
Retirement Agreement (the "Retirement Agreement") pursuant to which Dr. Hasan
resigned as Chief Executive Officer of the Company. The Retirement Agreement
provided for the payment of $165,000 to Dr. Hasan for his service as Chairman of
the Board of Directors and in lieu of the annual retainer and fees paid to
non-employee directors, and that Dr. Hasan would not entitled to participate in
any incentive or benefit program or to receive any stock options or equity
awards generally made available to non-employee directors. In consideration of
the cancellation of the Hasan Agreement, Dr. Hasan received a lump sum payment
of $2,000,000. Dr. Hasan also received a pro rata executive bonus for the
portion of the year for which he served as Chief Executive Officer. Medical
coverage will continue to be provided for Dr. Hasan and his spouse until they
individually attain age 65. Under the Retirement Agreement, all stock options of
Dr. Hasan become exercisable at the same time and to the same extent as prior to
his retirement, provided that any option becoming exercisable after the date of
the Retirement Agreement will terminate as of May 31, 2001. As consideration for
a mutual release of claims provided pursuant to the Retirement Agreement, Dr.
Hasan also received a lump sum payment of $1,750,000.
EMPLOYMENT AGREEMENT WITH MR. GELLERT. Mr. Gellert has a revised Employment
Letter Agreement with the Company dated August 22, 1997 (the "Gellert
Agreement"). Under the Gellert Agreement, during the term of his employment Mr.
Gellert is eligible to participate in various insurance, stock option,
25
<PAGE>
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 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 Agreement)
he will receive severance pay equal to three years of his then current annual
base salary and target bonus. Under the Gellert Agreement such severance pay may
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 Agreement),
Mr. Gellert will be entitled to receive a severance payment equal to three years
of his then current annual base salary and target bonus. In addition, the
Company will engage Mr. Gellert as a consultant for a consulting fee equal to
two years of his then target 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 Agreement.
EMPLOYMENT AGREEMENT WITH DR BERKBIGLER. Dr. Berkbigler has an Employment
Agreement with the Company (the "Berkbigler Agreement") which became effective
and was assumed by the Company upon consummation of the HSI Combination. The
Berkbigler Agreement has a five-year term, with an automatic one-year extension
on each anniversary of the agreement.
The Berkbigler Agreement provides for a minimum 7% increase in annual salary
each year. During the term of his employment, Dr. Berkbigler is eligible to
participate in the various insurance, stock option, pension, incentive
compensation and other fringe benefit plans and programs of the Company. Dr.
Berkbigler also is reimbursed for reasonable business expenses in performing his
duties.
If the Company terminates the employment of Dr. Berkbigler without "cause"
or if Dr. Berkbigler terminates his employment for "good reason" (each as
defined in the Berkbigler Agreement), 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 to Dr. Berkbigler his base salary and shall
continue his medical, health and accident insurance at the same coverage level
maintained for his benefit immediately prior to the date of termination.
EMPLOYMENT AGREEMENT WITH MR. VELASQUEZ. Pursuant to the FHS Combination,
the Company assumed the three-year employment letter agreement between
Foundation Health Corporation and Mr. Velasquez dated May 1, 1996 (the
"Velasquez Agreement"). Under the Velasquez Agreement, Mr. Velasquez is eligible
to participate in various insurance, stock option, pension, incentive
compensation and other fringe benefit plans of the Company. Mr. Velasquez is
also reimbursed for reasonable business expenses in performing his duties.
The Velasquez Agreement provides Mr. Velasquez with two potential severance
arrangements. If during a two-year period following a "change-of-control"
transaction, the Company terminates the employment of Mr. Velasquez or he
voluntarily resigns for "good reason" (each as defined in the Velasquez
Agreement), he will receive severance payments equal to one and one-half years
of his then current annual base salary, his awards under benefit plans will
become fully vested, and he will continue to participate in the Company's group
insurance plans for a period of one year. Such severance payments will not
exceed the applicable limitations under Section 280G of the Code (to avoid
penalty taxes and deduction limitations on "excess parachute payments").
26
<PAGE>
If the Company terminates the employment of Mr. Velasquez other than
following a change-of-control or for "cause" or "disability" (as defined in the
Velasquez Agreement), Mr. Velasquez will be entitled to receive a severance
payment equal to his then current annual base salary payable ratably over twelve
months. In addition, Mr. Velasquez will continue to participate in the Company's
insurance plans for a period of one year. Under the Velasquez Agreement, any
such payments made to Mr. Velasquez will be reduced to the extent they would
exceed the applicable limitations under Section 280G (to avoid penalty taxes and
deductions limitations on "excess parachute payments") or Section 4999 (for Mr.
Velasquez to avoid excise taxes) of the Code.
EMPLOYMENT AGREEMENT WITH MR. COSTA. The Company entered into a three-year
employment letter agreement with Mr. Costa dated December 31, 1997 (the "Costa
Agreement"). The Costa Agreement provides for a special bonus at the
commencement of the employment term and a retention bonus payable one-half at
the time of commencement and one-half on the first anniversary of commencement.
In return for such bonus provisions, Mr. Costa agreed to forfeit 60,000 shares
of common stock underlying options previously granted to him. Under the Costa
Agreement, Mr. Costa is eligible to participate in various insurance, stock
option, pension, incentive compensation and other fringe benefit plans of the
Company. Under the Costa Agreement, Mr. Costa is also reimbursed for reasonable
business expenses in performing his duties.
The Company and Mr. Costa entered into a Severance Payment Agreement dated
April 6, 1998 (the "Costa Severance Agreement"). Under the Costa Severance
Agreement, in the event Mr. Costa's employment is terminated without cause
within two years of a Change of Control or he voluntarily terminates his
employment for Good Reason (each as defined in the Costa Severance Agreement),
Mr. Costa shall be entitled to a lump sum payment equal to three times his then
current base salary and continuation of all health and welfare benefit coverage
for a period of three years. If termination of Mr. Costa's employment without
cause occurs at any time other than within two years after a Change of Control
(as defined in the Costa Severance Agreement), Mr. Costa shall be entitled to a
lump sum payment equal to one times his then current base salary. Any such
severance payments shall be reduced so as not to exceed the limitations under
Section 280G of the Code (to avoid penalty taxes and deduction limitations on
"excess parachute payments").
EMPLOYMENT AGREEMENT WITH MR. NATT. The Company entered into a three-year
employment letter agreement with Mr. Natt dated December 31, 1997 (the "Natt
Agreement") in connection with the Company's acquisition of Physician Health
Services, Inc. (of which entity Mr. Natt served as President). Under the Natt
Agreement, Mr. Natt was eligible to participate in various insurance, pension,
and other fringe benefit plans of the Company, but was not eligible to
participate in any equity-based or incentive plans of the Company (other than
the grant of stock options awarded at the time of entering into the Natt
Agreement) unless the term of the Natt Agreement was extended. Mr. Natt was also
reimbursed for reasonable business expenses in performing his duties. In
addition, the Natt Agreement provided for the payment of a special bonus at the
commencement of employment and a retention bonus payable on each of the first
and second anniversaries of the commencement date.
The Natt Agreement provided for severance payments to Mr. Natt in the event
he terminated his employment with the Company for "good reason" (as defined in
the Natt Agreement) within the first two years of the employment term. Such
severance payments ranged between two and 2.99 times his annual base salary,
depending upon the reason for termination. Subsequent to the first two years of
employment, any severance payment required would be equal to one and one-half
times the annual base salary.
Pursuant to a Waiver and Release of Claims (the "Natt Waiver"), Mr. Natt and
the Company agreed to the termination of Mr. Natt's employment as of December
31, 1998. The Natt Waiver provides for the payment to Mr. Natt of 2.99 times his
base salary and the second anniversary retention bonus, continued health and
other insurance coverage until the age of 65 or the date he obtains subsequent
employment, continued use of a leased automobile until the end of the lease term
(September 14, 2001), $12,000 for
27
<PAGE>
legal and financial planning expenses, full vesting of all stock options and
exercisability of such options until December 31, 2000, and certain other
benefits. In return, Mr. Natt released the Company from any and all potential
claims and agreed not to compete with the Company for a period of one year.
Payments under the Natt Waiver will be reduced to the extent they exceed the
applicable limitations under Section 280G of the Code (to avoid penalty taxes
and deduction limitations on "excess parachute payments").
NEW SEVERANCE AGREEMENT. On December 4, 1998, the Compensation Committee
approved a form of severance payment agreement to be entered into between the
Company and each of the Named Executive Officers, other than the Chief Executive
Officer and Mr Natt. Under such severance agreement, the executive would receive
three times base salary plus continued health and welfare benefit coverage for
three years if involuntarily terminated (or constructively terminated) within
two years after a change in control (as defined therein). Change in control
benefits are subject to reduction to the extent such reduction would improve the
executive's after-tax position by eliminating any excise taxes otherwise imposed
on the executive under the parachute payment provisions of the Code. Under such
severance agreements, terminated executives are precluded from competing with
the Company for a period of up to one year post-termination, depending on the
applicable circumstances, and must enter into a Waiver and Release of Claims in
order to receive severance payments. Upon execution of the new severance
agreement, such agreement will supersede any prior severance payment agreements
or arrangements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Decisions regarding the Company's executive compensation are made by the
Compensation Committee. In 1998 the Compensation Committee consisted of Messrs.
Bouchard (Chairman), Farley, Hanselman and Troubh, each of whom was an "outside
director" (within the meaning of Section 162(m) of the Code).
The following information relates to transactions by the Company with the
foregoing members of the Compensation Committee of the Company.
Mr. Bouchard, a director of the Company, is Senior Vice President, Human
Resources of IBM. During 1998, the Company engaged IBM as a consultant with
respect to various matters, including management of its Year 2000 program.
During 1998, the Company paid IBM approximately $8.0 million in consulting fees.
DIRECTORS' COMPENSATION FOR 1998
During 1998, the annual retainer payable to non-employee directors of the
Company was $30,000 per year, and each non-employee director who chaired the
Audit Committee, Compensation Committee or Committee on Directors was eligible
to receive an additional annual retainer of $5,000. Such non-employee directors
also received 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. Upon Dr. Hasan's retirement
as Chief Executive Officer in August 1998, he received $165,000 under his
Retirement Agreement for continuing service as Chairman of the Board of
Directors through March 1, 1999 and was not eligible for any compensation paid
to non-employee directors.
In addition, in 1998 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 stockholders at the
1997 Annual Stockholders Meeting and which provides for initial grants and
automatic annual grants of nonqualified stock options to such directors. Each
such grant entitles 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 33 1/3% 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, 10 million
shares of Class A Common Stock have been reserved for grant.
28
<PAGE>
On May 8, 1998 options to purchase 7,500 shares at an exercise price of
$32.125 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.
Effective May 1, 1998, the Company adopted a deferred compensation plan
pursuant to which both officers and non-employee directors are eligible to defer
up to 100% of their compensation. The compensation deferred under such plan is
credited with earnings or losses measured by the rate of return on investments
elected by plan participants. Each plan participant is fully vested in all
deferred compensation and earnings credited to his or her account.
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 OWNERSHIP PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER (1) OF CLASS
- ------------------------------------------------------------------------------ ---------------------- -----------
<S> <C> <C>
Legg Mason, Inc............................................................... 11,833,032(2) 10.1%
100 Light Street
Baltimore, Maryland 21202
Sanford C. Bernstein & Co., Inc. ............................................. 11,117,323(3) 9.5%
767 Fifth Avenue
New York, New York 10153
Invista Capital Management, LLC .............................................. 8,067,367(4) 6.9%
699 Walnut, 1800 Hub Tower
Des Moines, Iowa 50309
Principal Mutual Holding Company ............................................. 8,067,367(4) 6.9%
711 High Street
Des Moines, Iowa 50392-0088
Franklin Resources, Inc. ..................................................... 7,555,690(5) 6.5%
777 Mariners Island Blvd.
San Mateo, California 94404
Wellington Management Company, LLP ........................................... 7,269,460(6) 6.2%
75 State Street
Boston, Massachusetts 02109
Vanguard/Windsor Funds, Inc. ................................................. 7,267,660(7) 6.2%
P. O. Box 2600
Valley Forge, Pennsylvania 19482-2600
</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) Legg Mason, Inc. ("Legg Mason") is a parent holding company whose
subsidiaries Legg Mason Fund Adviser, Inc., Bartlett and Co., and Legg Mason
Capital Management, Inc. are investment advisers registered under the
Investment Company Act of 1940, whose subsidiary Legg Mason Wood Walker,
Inc. is a broker/dealer, and whose subsidiary Legg Mason Trust Company is a
trust company. Accordingly, Legg Mason is deemed a beneficial owner for
purposes of Rule 13(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") since it, or its subsidiaries, has sole power to
29
<PAGE>
vote or direct the vote of 9,339,933 shares, shared power to vote or direct
the vote of 2,492,969 shares, sole power to dispose or direct the
disposition of 9,340,063 shares and shared power to dispose or direct the
disposition of 2,492,969 shares of the Company's Class A Common Stock listed
in the table.
(3) Sanford C. Bernstein & Co., Inc. ("SBC") is a registered investment
adviser/broker dealer. An aggregate of 11,117,323 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 6,750,614 of such shares. In addition,
one or more of SBC's clients have appointed an independent voting agent with
instructions to vote an additional 972,271 of such shares in the same manner
as SBC. SBC's clients have the right to receive dividends from and the
proceeds of the sale of such shares.
(4) Invista Capital Management, Inc. and Principal Mutual Holding Company are
investment advisers registered under the Investment Advisers Act of 1940
and, as such, are deemed beneficial owners for purposes of Rule 13(d) of the
Exchange Act since they have shared power to vote or direct the vote and
shared power to dispose or direct the disposition of the shares of the
Company's Class A Common Stock listed in the table.
(5) Franklin Resources, Inc. ("FRI") is a parent holding company whose
wholly-owned subsidiary Franklin Mutual Advisers, Inc. ("FMAI") is an
investment adviser registered under the Investment Advisers Act of 1940. One
or more of FMAI's advisory clients is the legal owner of an aggregate of
7,555,690 shares of the Company's Class A Common Stock. Pursuant to
investment advisory agreements with its advisory clients, FMAI 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 stockholders of FRI. Each of the Principal Stockholders,
therefore, may be deemed to have indirect beneficial ownership over such
shares. The Principal Stockholders, FRI and FMAI 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) Wellington Management Company, LLP is an investment adviser registered under
the Investment Advisers 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 of 1,800 shares and shared power to
dispose or direct the disposition of all the shares of Class A Common Stock
listed in the table.
(7) 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 of the Company's Class A Common Stock listed in
the table.
The foregoing information relates only to the ownership of the Company's
Class A Common Stock. In addition, the CWF holds 5,047,642 shares of the
Company's Class B Common Stock, constituting all of the shares of that class and
approximately 4% 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-for-one basis into fully voting
shares of Class A Common Stock. Until December 31, 1998, transfer of such shares
was subject to certain restrictions set forth in the CWF Shareholder Agreement.
30
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the number of shares of Class A Common Stock
beneficially owned as of the Record Date by each of the current directors of the
Company, by each Named Executive Officer in 1998 and by all current directors
and executive officers as a group, 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...................................................... 4,680,834(2) 4.0%
J. Thomas Bouchard....................................................... 25,000(3) *
George Deukmejian........................................................ 25,399(4) *
Thomas T. Farley......................................................... 67,500(5) *
Patrick Foley............................................................ 24,500(6) *
Earl B. Fowler........................................................... 53,650(7) *
Roger F. Greaves......................................................... 39,743(8) *
Richard W. Hanselman..................................................... 43,228(9) *
Richard J. Stegemeier.................................................... 37,500(10) *
Raymond S. Troubh........................................................ 77,453(11) *
Jay M. Gellert........................................................... 125,000(12) *
Dale T. Berkbigler, M.D.................................................. 456,381(13) *
Gary S. Velasquez........................................................ 100,952(14) *
Maurice Costa............................................................ 121,316(15) *
Robert Natt.............................................................. 160,000(16) *
All current executive officers and directors as a group (21 persons)..... 1,317,532(17) 1.1%
</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 663,332 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, 70,000 shares with respect to which Dr. Hasan
has the right to acquire beneficial ownership by virtue of outstanding
options that vest within 60 days of March 12, 1999, 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.
(3) Includes 21,500 shares with respect to which Mr. Bouchard has the right to
acquire beneficial ownership by virtue of outstanding vested options and
2,500 shares with respect to which Mr. Bouchard has the right to acquire
beneficial ownership by virtue of outstanding options that vest within 60
days of March 12, 1999.
(4) Includes 22,199 shares with respect to which Mr. Deukmejian has the right
to acquire beneficial ownership by virtue of outstanding vested options and
2,500 shares with respect to which Mr. Deukmejian has the right to acquire
beneficial ownership by virtue of outstanding options that vest within 60
days of March 12, 1999. Such amount also includes 700 shares held in the C.
George Deukmejian Defined Benefit Pension Plan, of which Mr. Deukmejian is
a trustee.
(5) Includes 26,500 shares with respect to which Mr. Farley has the right to
acquire beneficial ownership by virtue of outstanding vested options and
2,500 shares with respect to which Mr. Farley has the right to acquire
beneficial ownership by virtue of outstanding options that vest within 60
days of March 12, 1999. Such amount also includes 10,000 shares held by the
Farley Family Trust over which
31
<PAGE>
trust Mr. Farley has investment power. Mr. Farley disclaims beneficial
ownership of the shares held by the Farley Family Trust.
(6) Includes 22,000 shares with respect to which Mr. Foley has the right to
acquire beneficial ownership by virtue of outstanding vested options and
2,500 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 12, 1999.
(7) Includes 37,728 shares with respect to which Adm. Fowler has the right to
acquire beneficial ownership by virtue of outstanding vested options and
2,500 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 12, 1999.
(8) Includes 7,500 shares with respect to which Mr. Greaves has the right to
acquire beneficial ownership by virtue of outstanding vested options and
2,500 shares with respect to which Mr. Greaves has the right to acquire
beneficial ownership by virtue of outstanding options that vest within 60
days of March 12, 1999.
(9) Includes 37,728 shares with respect to which Mr. Hanselman has the right to
acquire beneficial ownership by virtue of outstanding vested options and
2,500 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 12, 1999.
(10) Includes 35,000 shares with respect to which Mr. Stegemeier has the right
to acquire beneficial ownership by virtue of outstanding vested options
and 2,500 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 12, 1999.
(11) Includes 37,728 shares with respect to which Mr. Troubh has the right to
acquire beneficial ownership by virtue of outstanding vested options and
2,500 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 12, 1999.
(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 108,999 shares with respect to which Dr. Berkbigler has the right
to acquire beneficial ownership by virtue of outstanding vested options,
5,000 shares with respect to which Dr. Berkbigler has the right to acquire
beneficial ownership by virtue of outstanding options that vest within 60
days of March 12, 1999, 338,176 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 99,933 shares with respect to which Mr. Velasquez has the right
to acquire beneficial ownership by virtue of outstanding vested options.
(15) Includes 110,915 shares with respect to which Mr. Costa has the right to
acquire beneficial ownership by virtue of outstanding vested options,
8,667 shares with respect to which Mr. Costa has the right to acquire
beneficial ownership by virtue of outstanding options that vest within 60
days of March 12, 1999 and 382 shares held in the Company's 401(k) plan.
(16) Includes 150,000 shares with respect to which Mr. Natt has the right to
acquire beneficial ownership by virtue of outstanding vested options.
(17) Includes an aggregate of 892,729 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 38,567 shares with respect to which all current executive
officers and
32
<PAGE>
directors as a group have the right to acquire beneficial ownership by
virtue of outstanding options that vest within 60 days of March 12, 1999.
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, 1998, except as follows: Karen Coughlin did not timely file a Form
3 upon joining the Company on October 23, 1998, and Maurice Costa did not timely
file a Form 5 to reflect a cancellation on December 31, 1997 of options to
purchase 60,000 shares of Class A Common Stock.
PROPOSAL 2--RATIFICATION OF SELECTION OF
INDEPENDENT PUBLIC ACCOUNTANTS
Upon recommendation of the Audit Committee, the Board of Directors of the
Company has selected Deloitte & Touche LLP to audit the consolidated financial
statements of the Company and its subsidiaries for the fiscal year ending
December 31, 1999. Deloitte & Touche LLP has served in this capacity since June
3, 1994. Representatives of Deloitte & Touche LLP are expected to be present at
the Annual Meeting and will be available to respond to appropriate questions of
stockholders and to make a statement if they desire.
The affirmative vote of a majority of the votes cast on this proposal will
constitute ratification of the appointment of Deloitte & Touche LLP.
The Board of Directors is submitting the approval of Deloitte & Touche LLP
to stockholders as a matter of good corporate practice, although it is not
required to do so. Should the stockholders fail to provide such ratification,
the Board of Directors will reconsider its approval of Deloitte & Touche LLP as
the Company's independent public accountants for the year ended December 31,
1999. Even if the selection is ratified, the Board of Directors, in its
discretion, may direct the appointment of a new independent accounting firm at
any time during the fiscal year if the Board of Directors feels that such a
change would be in the best interests of the Company and its stockholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 2
TO RATIFY THE SELECTION OF DELOITTE & TOUCHE LLP AS THE COMPANY'S
INDEPENDENT PUBLIC ACCOUNTANTS.
33
<PAGE>
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
2000 Annual Meeting of Stockholders in May of 2000, 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 2000 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
Securities and Exchange Commission (the "SEC") and the By-Laws. Stockholders
wishing to nominate persons should contact the Company's Secretary at 21650
Oxnard Street, Woodland Hills, California 91367.
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 2000 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
14, 1999 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, SENIOR VICE PRESIDENT OF INVESTOR RELATIONS,
21650 OXNARD STREET, WOODLAND HILLS, CA 91367.
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,
[LOGO]
B. Curtis Westen, Esq.
SENIOR VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY
34
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
21650 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 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 12, 1999 at the annual meeting of
stockholders to be held on May 6, 1999 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.)
- --------------------------------------------------------------------------------
ON THE REVERSE SIDE OF THIS CARD ARE INSTRUCTIONS ON HOW TO VOTE YOUR
SHARES FOR THE ELECTION OF DIRECTORS AND ALL OTHER PROPOSALS OVER THE
INTERNET. PLEASE CONSIDER VOTING OVER THE INTERNET, WHICH IS EASY AND
CONVENIENT, AND YOUR VOTE IS RECORDED AS IF YOU MAILED IN YOUR PROXY CARD.
THANK YOU FOR YOUR ATTENTION TO THESE MATTERS.
<PAGE>
- --------------------------------------------------------------------------------
FOUNDATION HEALTH SYSTEMS, INC. /X/
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY.
[ ]
If no direction is made, this Proxy will be voted FOR Proposal 1 and Proposal 2
and in the direction of the Proxies as to any other matter that may
properly come before the Annual Meeting.
1. Election of Directors -
NOMINEES: J. Thomas Bouchard, Thomas T. Farley,
Patrick Foloy and Richard J. Stegemeier.
-------------------------------------------------
(Except nominee(s) as written above)
For Withhold For All
All All Except
/ / / / / /
2. To ratify the selection of Deloitte & Touche LLP as the
Company's independent auditors.
For Against Abstain
/ / / / / /
3. 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 6, 1999 and the related Proxy Statement. This
Proxy, when properly executed, will be voted in the manner directed herein by
the undersigned stockholder.
THIS SPACE RESERVED FOR ADDRESSING
(key lines do not print)
Dated: , 1999
-----------
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.
- -------------------------------------------------------------------------------
DETACH PROXY CARD HERE
CONTROL NUMBER
- --------------
- --------------
NOW YOU CAN VOTE YOUR SHARES VIA THE INTERNET!
QUICK - EASY - IMMEDIATE - AVAILABLE 24 HOURS A DAY - 7 DAYS A WEEK
-------------------------------------------------
TO VOTE VIA THE INTERNET Go to the following website:
www.harrisbank.com/wproxy
Enter the information requested on your computer
screen, including your 6-digit CONTROL NUMBER
located above.
Follow the simple instructions on the screen.
-------------------------------------------------
If you vote using the Internet, DO NOT mail back the proxy card unless you
wish to change your vote.
Note: Internet voting is only available until
5:00 p.m. (CDT) on Tuesday, May 4, 1999.
THANK YOU FOR VOTING!
