<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 1-12718
------------------------
FOUNDATION HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4288333
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
21650 OXNARD STREET, WOODLAND HILLS, CA 91367
(Address of principal executive offices) (Zip Code)
(818) 676-6978
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
The number of shares outstanding of the registrant's Class A Common Stock as
of August 11, 1999 was 117,659,410 (excluding 3,194,374 shares held as treasury
stock) and 4,567,442 shares of Class B Common Stock were outstanding as of such
date.
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<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1--Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998.......................... 3
Condensed Consolidated Statements of Operations for the Second Quarter Ended June 30, 1999 and 1998...... 4
Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 1999 and 1998.......... 5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998.......... 6
Notes to Condensed Consolidated Financial Statements..................................................... 7
Item 2--Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 11
Item 3--Quantitative and Qualitative Disclosures About Market Risk......................................... 21
PART II--OTHER INFORMATION
Item 1--Legal Proceedings.................................................................................. 22
Item 2--Changes in Securities.............................................................................. 23
Item 3--Defaults Upon Senior Securities.................................................................... 24
Item 4--Submission of Matters to a Vote of Security Holders................................................ 24
Item 5--Other Information.................................................................................. 25
Item 6--Exhibits and Reports on Form 8-K................................................................... 29
Signatures................................................................................................. 35
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOUNDATION HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................... $ 475,755 $ 763,865
Investments--available for sale................. 576,849 525,082
Premiums receivable, net........................ 189,688 230,157
Amounts receivable under government contracts... 321,582 321,411
Deferred taxes.................................. 245,821 160,446
Reinsurance and other receivables............... 149,701 147,827
Other assets.................................... 76,971 91,096
------------ ------------------
Total current assets.......................... 2,036,367 2,239,884
Property and equipment, net..................... 320,769 345,269
Goodwill and other intangible assets, net....... 934,399 977,910
Deferred taxes.................................. -- 118,759
Other assets.................................... 165,083 181,447
------------ ------------------
Total Assets.................................. $ 3,456,618 $ 3,863,269
------------ ------------------
------------ ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Reserves for claims and other settlements....... $ 1,022,953 $ 1,006,799
Unearned premiums............................... 54,310 288,683
Notes payable and capital leases................ 2,535 1,760
Amounts payable under government contracts...... 85,450 69,792
Accounts payable and other liabilities.......... 340,398 458,397
------------ ------------------
Total current liabilities..................... 1,505,646 1,825,431
Notes payable and capital leases................ 1,089,190 1,254,278
Deferred taxes.................................. 21,121 --
Other liabilities............................... 28,981 39,518
------------ ------------------
Total Liabilities............................. 2,644,938 3,119,227
------------ ------------------
Stockholders' Equity:
Common Stock and additional paid-in capital..... 642,795 641,945
Treasury Class A common stock, at cost.......... (95,831) (95,831)
Accumulated other comprehensive loss............ (10,410) (7,308)
Retained earnings............................... 275,126 205,236
------------ ------------------
Total stockholders' equity.................... 811,680 744,042
------------ ------------------
Total Liabilities and Stockholders' Equity.... $ 3,456,618 $ 3,863,269
------------ ------------------
------------ ------------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SECOND QUARTER ENDED JUNE
30,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES
Health plan premiums.............................................................. $ 1,743,698 $ 1,783,109
Government contracts/Specialty services........................................... 365,797 360,827
Investment and other income....................................................... 21,976 23,444
Loss on sale of businesses........................................................ (5,810) --
------------ ------------
Total revenues.................................................................. 2,125,661 2,167,380
------------ ------------
EXPENSES
Health plan services.............................................................. 1,474,360 1,493,723
Government contracts/Specialty services........................................... 241,840 233,574
Selling, general and administrative............................................... 314,674 334,856
Depreciation...................................................................... 17,037 20,093
Amortization...................................................................... 10,544 11,412
Interest.......................................................................... 20,657 22,193
Asset impairments and other costs................................................. -- 50,000
------------ ------------
Total expenses.................................................................. 2,079,112 2,165,851
------------ ------------
Income from operations before income taxes.......................................... 46,549 1,529
Income taxes........................................................................ 18,580 573
------------ ------------
Net income.......................................................................... $ 27,969 $ 956
------------ ------------
------------ ------------
Basic and diluted earnings per share................................................ $ 0.23 $ 0.01
------------ ------------
------------ ------------
Weighted average shares outstanding:
Basic............................................................................... 122,279 121,957
Diluted............................................................................. 123,161 122,335
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES
Health plan premiums................................................................ $ 3,516,078 $ 3,562,631
Government contracts/Specialty services............................................. 733,104 668,863
Investment and other income......................................................... 40,633 49,594
Net gain on sale of businesses...................................................... 47,748 --
------------ ------------
Total revenues.................................................................... 4,337,563 4,281,088
------------ ------------
EXPENSES
Health plan services................................................................ 2,974,794 2,976,149
Government contracts/Specialty services............................................. 480,894 425,042
Selling, general and administrative................................................. 636,589 678,706
Depreciation........................................................................ 34,776 37,913
Amortization........................................................................ 21,528 24,433
Interest............................................................................ 42,595 44,054
Restructuring, asset impairments and other costs.................................... 21,059 50,000
------------ ------------
Total expenses.................................................................... 4,212,235 4,236,297
------------ ------------
Income from operations before income taxes and cumulative effect of change in
accounting principle................................................................ 125,328 44,791
Income taxes.......................................................................... 50,021 17,597
------------ ------------
Income before cumulative effect of change in accounting principle..................... 75,307 27,194
Cumulative effect of change in accounting principle................................... 5,417 --
------------ ------------
Net income............................................................................ $ 69,890 $ 27,194
------------ ------------
------------ ------------
Basic and diluted earnings per share:
Income before cumulative effect of change in accounting principle..................... $ 0.62 $ 0.22
Cumulative effect of change in accounting principle................................... 0.05 --
------------ ------------
Net income............................................................................ $ 0.57 $ 0.22
------------ ------------
------------ ------------
Weighted average shares outstanding:
Basic................................................................................. 122,257 121,786
Diluted............................................................................... 122,296 122,117
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................................. $ 69,890 $ 27,194
Adjustments to reconcile net income to net cash used in operating activities:
Amortization and depreciation......................................................... 56,304 62,346
Net gain on sale of businesses........................................................ (47,748) --
Net gain on sale of buildings......................................................... (2,482) --
Cumulative effect of change in accounting principle................................... 5,417 --
Asset impairments..................................................................... -- 35,000
Other changes......................................................................... 2,263 (4,286)
Changes in assets and liabilities, net of effect of dispositions:
Premiums receivable................................................................. 34,681 (16,744)
Unearned premiums................................................................... (233,570) (144,432)
Other assets........................................................................ 67,606 (63,156)
Amounts receivable/payable under government contracts............................... 15,487 (33,897)
Reserves for claims and other settlements........................................... 22,429 (114,242)
Accounts payable and accrued liabilities............................................ (137,258) (104,263)
----------- -----------
Net cash used in operating activities................................................... (146,981) (356,480)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale or maturity of investments......................................................... 264,781 428,586
Purchase of investments................................................................. (320,612) (436,577)
Purchases of property and equipment..................................................... (13,591) (77,263)
Net proceeds from the sale of businesses................................................ 76,000 --
Net proceeds from the sale of buildings................................................. 7,433 --
Other................................................................................... 8,323 5,677
----------- -----------
Net cash provided by (used in) investing activities..................................... 22,334 (79,577)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases.................... 850 12,349
Proceeds from issuance of notes payable and other financing arrangements................ 20,000 115,560
Repayment of debt and other non-current liabilities..................................... (184,313) (526)
----------- -----------
Net cash provided by (used in) financing activities..................................... (163,463) 127,383
----------- -----------
Net decrease in cash and cash equivalents............................................... (288,110) (308,674)
Cash and cash equivalents, beginning of period.......................................... 763,865 559,360
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................................ $ 475,755 $ 250,686
----------- -----------
----------- -----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following notes should be read in conjunction with the notes to the
consolidated financial statements and the management's discussion and analysis
of financial condition and results of operations for each of the three years in
the period ended December 31, 1998 incorporated by reference in the Foundation
Health Systems, Inc. (the "Company") Annual Report on Form 10-K for the year
ended December 31, 1998 as well as the consolidated operating results presented
in the management's discussion and analysis contained in this Quarterly Report
on Form 10-Q.
NOTE 1--BASIS OF PRESENTATION
In the opinion of management, the accompanying condensed consolidated
financial statements include all normal and recurring adjustments necessary for
a fair presentation of the consolidated financial position of the Company and
the consolidated results of its operations and its cash flows for the interim
periods presented. Although the Company believes that the disclosures in these
financial statements are adequate to make the information presented not
misleading, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission (the "Commission") applicable to
quarterly reports on Form 10-Q. Results of operations for the interim periods
are not indicative of results to be expected for the full year.
Certain prior period amounts have been reclassified to conform with the
current period presentation. In the second quarter ended June 30, 1999, the
Company reclassified and adjusted certain intercompany revenues and expenses
which did not impact net income or earnings per share. In addition, in the first
quarter ended March 31, 1999, the Company reclassified medical management
expenses from health plan medical expenses to selling, general and
administrative expenses ("SG&A") and also recorded SG&A expenses of its
Specialty services businesses in SG&A, rather than in Specialty services costs
as had been the case in prior periods.
NOTE 2--RESTRUCTURING, ASSET IMPAIRMENTS AND OTHER COSTS
During 1998, the Company initiated a formal plan to dispose of certain
Central Division health plans included in the Company's Health Plan Services
segment in accordance with its strategic plan to focus on core operations. In
this connection, the Company implemented a formal plan during the first quarter
ended March 31, 1999 to close the Colorado regional processing center for these
health plans and transfer its operations to the Company's other administrative
facilities. In August 1999, the Company sold certain of the processing center
facilities and accompanying real estate. See "Item 5. Recent Developments--
Colorado Operations." The closure of the remaining processing center facilities
is expected to be completed for all but the Colorado operations by the end of
the third quarter of 1999. The Company recorded a pretax restructuring charge of
$21.1 million during the first quarter of 1999. Of the $21.1 million of
restructuring costs, $1.4 million represented cash payments and $16.5 million is
expected to require future outlays of cash as of June 30, 1999.
During 1998, FPA Medical Management, Inc. ("FPA") filed for bankruptcy
protection. FPA, through its affiliated medical groups, provided services to the
Company's affiliated members. The Company leased healthcare facilities to FPA
prior to the bankruptcy. As a result, the Company recorded $50.0 million of
charges primarily comprised of real estate asset impairments, notes receivable
impairments, and other items in the second quarter ended June 30, 1998.
7
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2--RESTRUCTURING, ASSET IMPAIRMENTS AND OTHER COSTS (CONTINUED)
During 1997 and 1998, the Company adopted restructuring plans, the principal
elements of which included a workforce reduction, the consolidation of employee
benefit plans, the consolidation of facilities in certain geographic locations,
the consolidation of overlapping provider networks and the consolidation of
information systems at all locations. Of the $167.9 million in net restructuring
costs recorded as part of the 1997 and 1998 plans, $9.7 million is expected to
require future outlays of cash and $3.5 million represents future non-cash
activities as of June 30, 1999.
NOTE 3--COMPREHENSIVE INCOME
The Company's comprehensive income for the three and six months ended June
30 is as follows (amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income.............................. $ 27,969 $ 956 $ 69,890 $ 27,194
Other comprehensive income (loss), net
of tax:
Change in unrealized appreciation
(depreciation) on investments....... (1,725) (2,629) (3,102) 1,176
--------- --------- --------- ---------
Comprehensive income (loss)............. $ 26,244 $ (1,673) $ 66,788 $ 28,370
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
NOTE 4--EARNINGS PER SHARE
Basic earnings per share excludes dilution and reflects income divided by
the weighted average shares of common stock outstanding during the periods
presented. Diluted earnings per share is based upon the weighted average shares
of common stock and dilutive common stock equivalents (all of which are
comprised of stock options) outstanding during the periods presented; no
adjustment to income is required. Common stock equivalents arising from dilutive
stock options are computed using the treasury stock method. There were 881,000
and 39,000 shares of common stock equivalents for the three and six months ended
June 30, 1999, respectively, and 378,000 and 331,000 shares of common stock
equivalents for the three and six months ended June 30, 1998, respectively.
8
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5--SEGMENT INFORMATION
Presented below are segment data for the three and six months ended June 30,
1999 and 1998 (amounts in thousands):
<TABLE>
<CAPTION>
GOVERNMENT
HEALTH PLAN CONTRACTS/SPECIALTY CORPORATE/
SERVICES SERVICES OTHER TOTAL
------------ ----------------- --------------- ------------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1999
Revenues from external sources................... $ 1,743,698 $ 365,797 $ 16,166 $ 2,125,661
Intersegment revenues............................ 89,206 -- 5,902 95,108
Income (loss) before income taxes................ 30,140 23,572 (7,163) 46,549
THREE MONTHS ENDED JUNE 30, 1998
Revenues from external sources................... $ 1,783,109 $ 360,827 $ 23,444 $ 2,167,380
Intersegment revenues............................ 92,609 -- 9,331 101,940
Income (loss) before income taxes................ 36,392 37,361 (72,224) 1,529
SIX MONTHS ENDED JUNE 30, 1999
Revenues from external sources................... $ 3,516,078 $ 733,104 $ 88,381 $ 4,337,563
Intersegment revenues............................ 173,930 -- 13,848 187,778
Income before income taxes and cumulative effect
of change in accounting principle.............. 38,637 56,169 30,522 125,328
SIX MONTHS ENDED JUNE 30, 1998
Revenues from external sources................... $ 3,562,631 $ 668,863 $ 49,594 $ 4,281,088
Intersegment revenues............................ 163,801 -- 17,578 181,379
Income (loss) before income taxes................ 72,013 63,694 (90,916) 44,791
</TABLE>
NOTE 6--CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1999, the Company adopted Statement of Position 98-5
"Reporting on the Costs of Start-Up Activities" and changed its method of
accounting for start-up and organization costs. The change involved expensing
these costs as incurred, rather than the Company's previous accounting principle
of capitalizing and subsequently amortizing such costs.
The change in accounting principle resulted in the write-off of the costs
capitalized as of January 1, 1999. The cumulative effect of the write-off was
$5.4 million (net of tax benefit of $3.7 million) and has been expensed and
reflected in the condensed consolidated statement of operations for the six
months ended June 30, 1999.
NOTE 7--DISPOSITION OF ASSETS
On March 8, 1999, the Company entered into a definitive agreement for the
sale of its HMO operations in the state of New Mexico. Completion of the
transaction is subject to various conditions and certain regulatory approvals.
On March 31, 1999, the Company completed the sale of certain of its pharmacy
benefits processing operations for net cash proceeds of $65.0 million and
recognized a net gain of $53.6 million.
9
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7--DISPOSITION OF ASSETS (CONTINUED)
During the second quarter ended June 30, 1999, the Company completed the
sale of its HMO operations in the states of Texas, Louisiana and Oklahoma and
its preferred provider organization network subsidiary, Preferred Health
Network, Inc. As part of the transactions, the Company received certain cash
proceeds and convertible preferred stock. The Company recognized total losses on
the sales of $5.8 million, before taxes, in the second quarter ended June 30,
1999.
On July 2, 1999, the Company entered into a definitive agreement for the
sale of its HMO operations in the state of Utah. Completion of the transaction
is subject to various conditions and certain regulatory approvals.
On July 16, 1999, the Company entered into a definitive agreement for the
sale of its two California hospitals. Completion of the transaction is subject
to various conditions and certain regulatory approvals.
On December 10, 1998, the Company completed the sale of the workers'
compensation segment which was accounted for as discontinued operations for the
three and six months ended June 30, 1998. The loss on disposition of $99 million
recorded at December 31, 1997 included the anticipated results of discontinued
operations through the date of disposition; accordingly, net losses of $4.2
million and $7.9 million related to the operations of the workers' compensation
segment are not reflected on the Company's condensed consolidated statements of
operations for the three and six months ended June 30, 1998, respectively.
NOTE 8--LEGAL PROCEEDINGS
Complaints have been filed in federal and state courts seeking an
unspecified amount of damages on behalf of an alleged class of persons who
purchased shares of common stock, convertible subordinated debentures and
options to purchase common stock of FPA Medical Management, Inc. ("FPA") at
various times between February 3, 1997 and May 15, 1998. The complaints allege
that the Company and certain former officers violated federal and state
securities laws by misrepresenting and failing to disclose certain information
about a 1996 agreement between the Company and FPA, about FPA's business and
about the Company's 1997 sale of FPA common stock held by the Company.
Subsequent to the Company's filing of a motion to dismiss all claims asserted
against it in the consolidated federal class actions, all claims against the
Company's former officers were voluntarily dismissed from the consolidated class
actions in both federal and state court. Thereafter, all proceedings in the
consolidated federal class actions were stayed and the motion to dismiss was
denied without prejudice to renewal after the expiration of the stay. Management
believes these suits are without merit and intends to vigorously defend the
actions.
The Company and certain of its subsidiaries are also parties to various
other legal proceedings, many of which involve claims for coverage encountered
in the ordinary course of business. Based in part on advice from litigation
counsel to the Company and upon information presently available, management of
the Company is of the opinion that the final outcome of all such proceedings
should not have a material adverse effect on the financial position or results
of operations of the Company.
10
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Foundation Health Systems, Inc. (together with its subsidiaries, the
"Company") is an integrated managed care organization which administers the
delivery of managed health care services. The Company's operations consist of
two operating segments: Health Plan Services and Government contracts/ Specialty
services. Through its subsidiaries, the Company offers group, individual,
Medicaid and Medicare health maintenance organization ("HMO") and preferred
provider organization ("PPO") plans; government sponsored managed care plans;
and managed care products related to administration and cost containment,
behavioral health, dental, vision and pharmaceutical products and other
services.
The Health Plan Services segment consists of HMOs organized into four
operational divisions located in the following geographic regions: the
California Division, the Northeast Division, the Central Division and the
Arizona Division. During the six months ended June 30, 1999, these health plans
were located in Arizona, California, Colorado, Connecticut, Florida, Idaho, New
Jersey, New Mexico, New York, Ohio, Oregon, Pennsylvania, Utah, Washington and
West Virginia. The Company sold its HMO operations in the states of Louisiana,
Oklahoma and Texas effective April 30, 1999. The Company's health plans provide
a wide range of managed health care services throughout the United States with
approximately 4.0 million at risk and administrative services only members. The
Company's HMO subsidiaries contract to provide medical care services to a
defined, enrolled population for a predetermined, prepaid monthly fee for group,
individual Medicare and Medicaid plans throughout their respective service
areas. All of the HMOs are state licensed and some are also federally qualified.
The Company also operates PPO networks which provide access to health care
services and owns six health and life insurance companies licensed to sell
insurance throughout most of the United States. The financial results include
the results of two hospitals owned by the Company operating in California.
The Government contracts/Specialty services segment administers large,
multi-year managed health care government contracts. This segment subcontracts
to affiliated and unrelated third parties the administration and health care
risk of parts of these contracts and currently administers health care programs
covering approximately 1.5 million eligible individuals under the Civilian
Health and Medical Program of the Uniformed Services ("CHAMPUS") through the
TRICARE program. Currently, the Company provides these services under three
TRICARE contracts that cover Alaska, Arkansas, California, Hawaii, Oklahoma,
Oregon, Texas, Washington and parts of Arizona, Idaho and Louisiana. This
segment also offers behavioral health, pharmacy management, dental and vision
services and sub-acute hospital unit management as well as managed care and
workers' compensation products related to bill review, administration and cost
containment for hospitals, health plans and other entities.
This discussion and analysis contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve risks and uncertainties which may cause
actual results to differ materially from those projected or implied in these
statements. The risks and uncertainties faced by the Company include, but are
not limited to, those set forth under "Additional Information Concerning the
Company's Business," "Cautionary Statements" and other sections within the
Company's filings with the Securities and Exchange Commission.
CONSOLIDATED OPERATING RESULTS
The Company's net income for the second quarter ended June 30, 1999 was
$28.0 million, or $0.23 per basic and diluted share, compared to net income for
the comparable period in 1998 of $1.0 million, or $0.01 per basic and diluted
share. The Company's net income for the six months ended June 30, 1999 was $69.9
million, or $0.57 per basic and diluted share, compared to net income for the
comparable period in 1998 of $27.2 million or $0.22 per basic and diluted share.
Excluding the cumulative effect of the change in accounting principle for
organization and start up costs recorded during the first quarter of 1999, net
income was $75.3 million or $0.62 per basic and diluted share for the six months
ended June 30, 1999.
11
<PAGE>
The table immediately below and the paragraphs that follow provide selected
financial information related to the Company's performance for the 1999 and 1998
periods. The second table below, relating to the three months ended March 31,
June 30, September 30 and December 31, 1998 and March 31, 1999, contains certain
prior period amounts that have been reclassified to conform with the current
period presentation. In the second quarter ended June 30, 1999, the Company
reclassified and adjusted certain intercompany revenues and expenses which did
not impact net income or earnings per share. The reclassifications did result in
higher reported revenues in its Government Contracts/Specialty Services unit and
lower reported revenues and costs in its Health Plan services unit compared with
amounts previously disclosed. FHS believes this more accurately reflects the
performance of its specialty companies as if they were independent entities. In
addition, in the first quarter ended March 31, 1999, the Company reclassified
medical management expenses from health plan medical expenses to selling,
general and administrative expenses ("SG&A") and also recorded SG&A expenses of
its Specialty services businesses in SG&A, rather than in Specialty services
costs as had been the case in prior periods.
<TABLE>
<CAPTION>
SECOND QUARTER ENDED SIX MONTHS ENDED
-------------------------- --------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
(AMOUNTS IN THOUSANDS, EXCEPT PER MEMBER
PER MONTH AMOUNTS)
<S> <C> <C> <C> <C>
REVENUES:
Health plan premiums................................... $ 1,743,698 $ 1,783,109 $ 3,516,078 $ 3,562,631
Government contracts/Specialty services................ 365,797 360,827 733,104 668,863
Investment and other income............................ 21,976 23,444 40,633 49,594
Net gain (loss) on sale of businesses.................. (5,810) -- 47,748 --
------------ ------------ ------------ ------------
Total revenues....................................... 2,125,661 2,167,380 4,337,563 4,281,088
------------ ------------ ------------ ------------
EXPENSES:
Health plan services................................... 1,474,360 1,493,723 2,974,794 2,976,149
Government contracts/Specialty services................ 241,840 233,574 480,894 425,042
Selling, general and administrative.................... 314,674 334,856 636,589 678,706
Depreciation........................................... 17,037 20,093 34,776 37,913
Amortization........................................... 10,544 11,412 21,528 24,433
Interest............................................... 20,657 22,193 42,595 44,054
Restructuring, asset impairment and other costs........ -- 50,000 21,059 50,000
------------ ------------ ------------ ------------
Total expenses....................................... 2,079,112 2,165,851 4,212,235 4,236,297
------------ ------------ ------------ ------------
Income from operations before income taxes and cumulative
effect of change in accounting principle............... 46,549 1,529 125,328 44,791
Income tax provision..................................... 18,580 573 50,021 17,597
------------ ------------ ------------ ------------
Income before cumulative effect of change in accounting
principle.............................................. 27,969 956 75,307 27,194
Cumulative effect of change in accounting principle...... -- -- 5,417 --
------------ ------------ ------------ ------------
Net income............................................... $ 27,969 $ 956 $ 69,890 $ 27,194
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Administrative (SG&A + Depreciation) Ratio............... 15.72% 16.56% 15.80% 16.94%
Health plan MCR.......................................... 84.55% 83.77% 84.61% 83.54%
Government contracts/Specialty services MCR.............. 66.11% 64.73% 65.60% 63.55%
Overall MCR.............................................. 81.36% 80.57% 81.33% 80.38%
Health plan premiums per member per month................ $ 137.18 $ 126.30 $ 137.34 $ 126.49
Health plan services per member per month................ $ 115.99 $ 105.80 $ 116.20 $ 105.66
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1998 1998 1998 1998 1999
------------ ------------ ------------- ------------ ------------
(AMOUNTS IN THOUSANDS, EXCEPT PER MEMBER PER MONTH AMOUNTS)
<S> <C> <C> <C> <C> <C>
REVENUES:
Health plan premiums.................... $ 1,779,522 $ 1,783,109 $ 1,769,291 $1,792,239 $ 1,772,380
Government contracts/Specialty
services.............................. 308,036 360,827 348,732 393,672 367,307
Investment and other income............. 26,150 23,444 20,441 29,006 72,215
------------ ------------ ------------- ------------ ------------
Total revenues........................ 2,113,708 2,167,380 2,138,464 2,214,917 2,211,902
------------ ------------ ------------- ------------ ------------
EXPENSES:
Health plan services.................... 1,482,426 1,493,723 1,539,072 1,563,251 1,500,434
Government contracts/Specialty
services.............................. 191,468 233,574 232,346 266,687 239,054
Selling, general and administrative..... 343,850 334,856 350,406 361,759 321,915
Depreciation............................ 17,820 20,093 20,276 20,762 17,739
Amortization............................ 13,021 11,412 12,323 12,386 10,984
Interest................................ 21,861 22,193 23,626 24,479 21,938
Asset impairment and other costs........ -- 50,000 87,987 136,966 21,059
------------ ------------ ------------- ------------ ------------
Total expenses........................ 2,070,446 2,165,851 2,266,036 2,386,290 2,133,123
------------ ------------ ------------- ------------ ------------
Income (loss) from operations before
income taxes and cumulative effect of
change in accounting principle.......... 43,262 1,529 (127,572) (171,373) 78,779
Income tax provision (benefit)............ 17,024 573 (38,953) (67,640) 31,441
------------ ------------ ------------- ------------ ------------
Income (loss) before cumulative effect of
change in accounting principle.......... 26,238 956 (88,619) (103,733) 47,338
Cumulative effect of change in accounting
principle............................... -- -- -- -- 5,417
------------ ------------ ------------- ------------ ------------
Net income (loss)......................... $ 26,238 $ 956 $ (88,619) $ (103,733) $ 41,921
------------ ------------ ------------- ------------ ------------
------------ ------------ ------------- ------------ ------------
Administrative (SG&A + Depreciation)
Ratio................................... 17.33% 16.56% 17.50% 17.50% 15.87%
Health plan MCR........................... 83.30% 83.77% 86.99% 87.22% 84.66%
Government contracts/Specialty services
MCR..................................... 62.16% 64.73% 66.63% 67.74% 65.08%
Overall MCR............................... 80.18% 80.57% 83.64% 83.72% 81.30%
Health plan premiums per member per
month................................... $ 126.67 $ 126.30 $ 128.38 $ 133.89 $ 137.50
Health plan services per member per
month................................... $ 105.52 $ 105.80 $ 111.68 $ 116.78 $ 116.40
</TABLE>
13
<PAGE>
ENROLLMENT INFORMATION
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
-------------------- PERCENT
1999 1998 CHANGE
--------- --------- -----------
<S> <C> <C> <C>
Health Plan Services
Commercial............................................................................ 3,073 3,516 (12.6%)
Medicare Risk......................................................................... 269 318 (15.4%)
Medicaid.............................................................................. 673 550 22.4%
--------- ---------
4,015 4,384 (8.4%)
--------- ---------
Government Contracts:
CHAMPUS PPO and Indemnity............................................................. 684 782 (12.5%)
CHAMPUS HMO........................................................................... 817 662 23.4%
--------- ---------
1,501 1,444 (3.9%)
--------- ---------
</TABLE>
REVENUES AND HEALTH CARE COSTS
The Company's revenues decreased by $41.7 million or 1.9% for the second
quarter ended June 30, 1999 and $56.5 million or 1.3% for the six months ended
June 30, 1999 as compared to the comparable periods in 1998. Decreases in Health
Plan revenues of $39.4 million and $46.6 million for the second quarter and six
months ended June 30, 1999, respectively, as compared to the comparable periods
in 1998 were due primarily to decreases in enrollment partially offset by
increases in premium rates. The sale of the HMO operations in the states of
Texas, Louisiana and Oklahoma that eliminated approximately $7.0 million in
health plan revenues for the second quarter ended June 30, 1999 also contributed
to the decreases. Growth in Government contracts/Specialty services revenues
totaled $5.0 million and $64.2 million for the second quarter and six months
ended June 30, 1999, respectively, as compared to the comparable periods in
1998. This growth is primarily due to increases in government contracts and
mental health revenues which were partially offset by decreases in pharmacy
revenue. See "Segment Information" for further discussion of Health Plan
Services and Government contract/Specialty services.
Included in total revenues for the six months ended June 30, 1999 is a $53.6
million gain on the sale of certain pharmacy benefits processing services of the
Company during the first quarter of 1999 which was partially offset by losses
totaling $5.8 million related to the sale of certain businesses during the
second quarter of 1999.
The overall medical care ratio ("MCR") (medical costs as a percentage of
Health Plan premiums and Government contracts/Specialty services revenues) for
the second quarter and six months ended June 30, 1999 was 81.36% and 81.33%,
respectively, as compared to 80.57% and 80.38%, respectively, for the comparable
periods in 1998. The increases were primarily due to higher pharmacy costs in
most of the Company's health plans and increased costs from higher physician and
hospital costs.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
The Company's selling, general and administrative ("SG&A") expenses
decreased by $20.2 million or 6.0% for the second quarter ended June 30, 1999 as
compared to the comparable period in 1998. The Company's selling, general and
administrative ("SG&A") expenses decreased by $42.1 million or 6.2% for the six
months ended June 30, 1999 as compared to the comparable period in 1998. The
decrease in SG&A expenses during 1999 is primarily attributable to the Company's
ongoing efforts to control its SG&A expenses, savings associated with the
integration of its 1997 mergers and acquisitions, and reductions in costs
resulting from the sales of certain operations.
14
<PAGE>
AMORTIZATION AND DEPRECIATION
Amortization and depreciation expense decreased by $3.9 million and $6.0
million for the second quarter and six months ended June 30, 1999, respectively,
as compared to the comparable periods in 1998. The decrease is due to the
write-down of goodwill and other long-lived assets to their estimated fair value
during the year ended December 31, 1998 and the write-off of organization and
pre-operating costs during the first quarter ended March 31, 1999.
INTEREST EXPENSE
Interest expense decreased by $1.5 million for the second quarter and six
months ended June 30, 1999 and 1998 as compared to the comparable periods in
1998. A decrease in interest expense from the reduction in the revolving credit
facility balance was partially offset by a higher borrowing rate in 1999 as
compared to the comparable period in 1998.
INCOME TAX PROVISION
The effective tax rate was 39.9% on income from operations for the second
quarter and six months ended June 30, 1999, respectively, compared to the
effective tax rate on continuing operations of 37.5% and 39.3%, respectively,
for the comparable periods in 1998.
RESTRUCTURING AND OTHER COSTS
During 1998, the Company initiated a formal plan to dispose of certain
Central Division health plans included in the Company's Health Plan Services
segment in accordance with its strategic plan to focus on core operations. In
this connection, the Company implemented a formal plan during the first quarter
ended March 31, 1999 to close the Colorado regional processing center for these
health plans and transfer its operations to the Company's other administrative
facilities. In August 1999, the Company sold certain of the processing center
facilities and accompanying real estate. See "Item 5. Recent Developments--
Colorado Operations." The closure of the remaining processing center facilities
is expected to be completed for all but the Colorado operations by the end of
the third quarter of 1999. The Company recorded a pretax restructuring charge of
$21.1 million including $18.7 million for severance and $2.4 million for other
expenses associated with the closing of the facility during the first quarter
ended March 31, 1999. Of the $18.9 million remaining as of June 30, 1999,
approximately $16.5 million is expected to require future cash outlays.
SEGMENT INFORMATION
HEALTH PLAN SERVICES
Health Plan revenues decreased by $39.4 million or 2.2% in the second
quarter ended June 30, 1999 as compared to the comparable period in 1998 and
decreased by $46.6 million or 1.3% for the six months ended June 30, 1999 as
compared to the comparable period in 1998. These decreases were primarily due to
an 8.4% decrease in enrollment in the Company's health plans. The sale of the
HMO operations in the states of Texas, Louisiana, and Oklahoma eliminated
approximately $7.0 million in health plan revenues for the second quarter ended
June 30, 1999. Of the total membership decline, 65,000 members were enrolled in
plans that have been sold. These decreases were partially offset by an average
increase in premium rates as a result of instituting pricing discipline which
yielded a revenue per member per month ("PMPM") increase of 8.6% for the second
quarter and six months ended June 30, 1999.
Health Plan costs decreased by $19.4 million, or 1.3% for the second quarter
ended June 30, 1999 as compared to the comparable period in 1998 and decreased
by $1.4 million or 0.1% for the six months ended June 30, 1999 as compared to
the comparable period in 1998. The health plans MCR increased from 83.77% for
the second quarter ended June 30, 1998 to 84.55% for the comparable period in
1999 and from 83.54% for the six months ended June 30, 1998 to 84.61% for the
comparable period in 1999. These increases were primarily due to higher pharmacy
costs in most of the Company's health plans and increased costs from higher
physician and hospital costs.
15
<PAGE>
GOVERNMENT CONTRACTS/SPECIALTY SERVICES
Government contracts/Specialty services revenue increased by $5.0 million or
1.4% during the second quarter ended June 30, 1999 as compared to the same
period in 1998, and by $64.2 million or 9.6% for the six months ended June 30,
1999 as compared to the same period in 1998. Favorable revenue adjustments under
government contracts, coupled with growth in the managed behavioral health
network and bill review cost containment businesses, were partially offset by
loss of revenues previously generated by certain pharmacy benefits processing
services which were sold during the first quarter ended March 31, 1999.
Government contracts/Specialty services MCR increased to 66.11% in the
second quarter ended June 30, 1999 from 64.73% for the comparable 1998 period
and to 65.60% in the six months ended June 30, 1999 from 63.55% for the
comparable 1998 period. The increase was primarily a result of higher 1998
administrative government contract revenue having no associated health care
costs, only administrative costs.
IMPACT OF INFLATION AND OTHER ELEMENTS
The managed health care industry is labor intensive and its profit margin is
low; hence, it is especially sensitive to inflation. Increases in medical
expenses or contracted medical rates without corresponding increases in premiums
could have a material adverse effect on the Company.
Various federal and state legislative initiatives regarding the health care
industry have been proposed during recent legislative sessions, and health care
reform and similar issues continue to be in the forefront of social and
political discussion. If health care reform or similar legislation is enacted,
such legislation could impact the Company. Management cannot at this time
predict whether any such initiative will be enacted and, if enacted, the impact
on the financial condition or results of operations of the Company.
The Company's ability to expand its business is dependent, in part, on
competitive premium pricing and its ability to secure cost-effective contracts
with providers. Achieving these objectives is becoming increasingly difficult
due to the competitive environment. In addition, the Company's profitability is
dependent, in part, on its ability to maintain effective control over health
care costs while providing members with quality care. Factors such as health
care reform, integration of acquired companies, regulatory changes, utilization,
new technologies, hospital costs, major epidemics and numerous other external
influences may affect the Company's operating results. Accordingly, past
financial performance is not a reliable indicator of future performance, and
investors should not use historical records to anticipate results or future
period trends.
The Company's HMO and insurance subsidiaries are required to maintain
reserves to cover their estimated ultimate liability for expenses with respect
to reported and unreported claims incurred. These reserves are estimates of
future payments based on various assumptions. Establishment of appropriate
reserves is an inherently uncertain process, and there can be no certainty that
currently established reserves will prove adequate in light of subsequent actual
experience, which in the past has resulted and in the future could result in
loss reserves being too high or too low. The accuracy of these estimates may be
affected by external forces such as changes in the rate of inflation, the
regulatory environment, the judicial administration of claims, medical costs and
other factors. Future loss development or governmental regulators could require
reserves for prior periods to be increased, which would adversely impact
earnings in future periods. In light of present facts and current legal
interpretations, management believes that adequate provisions have been made for
claims and loss reserves.
The Company's HMO subsidiaries contract with providers in California, and to
a lesser degree in other areas, primarily through capitation fee arrangements.
Under a capitation fee arrangement, the Company's subsidiary pays the provider a
fixed amount per member on a regular basis and the provider accepts the risk of
the frequency and cost of member utilization of services. The inability of
providers to
16
<PAGE>
properly manage costs under capitation arrangements can result in financial
instability of such providers. Any financial instability of capitated providers
could lead to claims for unpaid health care against the Company's HMO
subsidiaries, even though such subsidiaries have made their regular payments to
the capitated providers. Depending on state law, the Company's HMO subsidiaries
may be liable for such claims.
YEAR 2000
The Company recognizes that the arrival of the year 2000 requires computer
systems to be able to recognize the date change from 1999 to 2000 and, like
other companies, is assessing and modifying its computer applications and
business processes to provide for their continued functionality.
The "Year 2000" issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, prepare invoices or
engage in normal business activities. In addition, the Year 2000 problems of the
Company's providers and customers, including governmental entities, can affect
the Company's operations, which are highly dependent upon information technology
for processing claims, determining eligibility and exchanging information.
PROJECT STATUS--The Year 2000 effort for the Company has the highest
priority of technology projects and has the full support of the Company's
management. The project has dedicated resources with multiple teams to address
its unique systems environment. Uniform project management techniques have been
adopted with overall oversight responsibility residing with the Company's Chief
Technology Officer, assisted by a special project manager hired by the Company.
An executive management committee is also actively and directly involved in an
oversight capacity in the Company's Year 2000 project and receives monthly
reports from the project manager. In addition, the project manager regularly
meets with the Company's audit committee to further discuss the Company's Year
2000 issues.
The Company is addressing its Year 2000 issues in several ways. Selected
systems are being retired with the business functions being converted to Year
2000 compliant systems. A number of the Company's systems include packaged
software from large vendors that the Company is closely monitoring to ensure
that these systems are Year 2000 compliant. The Company believes that vendors
will make timely updates available to ensure that all remaining purchased
software is Year 2000 compliant, and has determined that there are no
significant applications for which the Company does not have adequate ability to
work around in the event of failure. The remaining systems' compliance with Year
2000 will be addressed by internal technical staff. The Company has engaged IBM
Global Services to assist in the program management of the project. In addition,
the Company has assessed its third party relationships with respect to
non-information technology assets and services, retained IBM's The Wilkerson
Group, and has developed contingency plans to provide continuity of material
relationships. Legal consultants have been retained to assist with insurance
review and assessment of the Company's obligations and rights.
The Company has divided its internal Year 2000 effort into five phases: (1)
Assessment and Strategy, (2) Detailed Analysis and Planning, (3) Remediation,
(4) Testing and Implementation, and (5) Certification. During the second quarter
of 1999, the Company made substantial progress in its efforts to address Year
2000 issues. The Company has established the third quarter of 1999 to complete
all phases. The
17
<PAGE>
following table sets forth the estimated percentage completion of each of the
Company's Year 2000 phases with respect to its Year 2000 project overall.
<TABLE>
<CAPTION>
PHASE 1 PHASE 2 PHASE 3 PHASE 4
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Overall--July 1999............................................... 100% 100% 100% 88%
Overall--May 1999 (as reported in the Company's Quarterly Report
on Form 10-Q for the first quarter of 1999).................... 100% 100% 93% 55%
<CAPTION>
PHASE 5
-------------
<S> <C>
Overall--July 1999............................................... 54%
Overall--May 1999 (as reported in the Company's Quarterly Report
on Form 10-Q for the first quarter of 1999).................... 3%
</TABLE>
THIRD PARTIES--The Company has substantially completed its assessment of
third party relationships and has identified general purpose utility vendors,
care delivery organizations (such as providers), customer service vendors and
certain other entities as strategically important to the Company. During the
second quarter, the assessment was focused on delegated authorities and certain
other providers and the Company is endeavoring to obtain assurances from those
entities as to their Year 2000 readiness. There can be no assurance that the
systems of other companies on which the Company relies will be compliant on a
timely basis, or that the failure by a third party to be compliant would not
have a material adverse effect on the Company.
COSTS--The Company is evaluating on an on-going basis the related costs to
resolve its potential Year 2000 problems. The Company estimates that the total
cost for the project will be approximately $34-38 million, excluding the costs
to accelerate the replacement of hardware or software otherwise required to be
purchased by the Company. This represents a decrease in the expected overall
cost from $36-40 million, due in part to actual and expected cost-savings from
the shutdown or transfer of certain hardware and software associated with
certain completed divestitures. Through the second quarter of 1999, the Company
expended approximately $28.4 million relating to, among other things, the cost
to repair or replace software and related hardware problems, the cost of
assessment, analysis and planning, and internal and external communications. The
Company currently estimates that the percentages of its total expenditures for
Year 2000 issues will be approximately as follows: 36% for internal costs, 30%
for outside consultants and contractors and 34% for software-related and
hardware-related costs. The Company has established a line-item in its overall
operating budget specifically for Year 2000 costs. The operating subsidiaries
for each line of business of the Company, however, are paying for the costs of
assessment, planning, remediation, testing and certification of Year 2000 issues
for their respective operations.
Notwithstanding the foregoing, the costs of the project and the timetable in
which the Company plans to complete the Year 2000 compliance requirements are
based on estimates derived from utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. There can be no assurances that these
estimates will be achieved and actual results and costs could differ materially
from these estimates.
Certain insurance coverages for defense costs associated with Year 2000
litigation have already been secured under the Company's Directors and Officers
Liability Insurance policy. At this time, it is unclear as to the extent of
existing insurance coverage, if any, the Company may have to cover potential
Year 2000 costs and liabilities under its other insurance policies. The Company
is engaged in ongoing efforts to analyze the availability of such coverage under
other existing and future insurance policies and products.
CONTINGENCY PLANNING--An important part of the Company's Year 2000 project
involves identifying worst case scenarios and seeking to develop contingency
plans. The Company has completed the assessment of its mission critical business
functions and has prioritized them in order to address the most critical issues
first in remediation efforts and to develop alternatives to these critical
processes as part of contingency planning. A mission critical business activity
or system is one that cannot be without an automated or functional system for a
period of 21 days without causing significant business impact to the particular
line of business. Among other things, the Company's divisions have assessed
potential negative impacts on a valid member's ability to receive services, the
ability to generate revenue, the need for
18
<PAGE>
additional expenditures, compliance with legal, regulatory or accreditation
requirements, meeting contractual obligations and reimbursing providers, vendors
and agents. The Company has documented and tested its contingency plans. Such
contingency plans include, among other things, the use of manual as well as
on-line files of its members to avoid disruption in the verification of
membership and eligibility for the provision of health care services to its
members. There can be no assurance that the contingency plans of the Company, if
implemented, will adequately address Year 2000 problems that may arise or
prevent such problems from having a material adverse effect on the Company's
operations.
RISKS--The Company is highly dependent upon its own information technology
systems and that of its providers and customers. Failure by the Company or a
third party to correct a material Year 2000 problem could result in a failure of
or an interruption in the Company's business activities and operations. Such
interruptions and failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the readiness of third party providers and customers, the Company
is not able at this time to determine whether the Year 2000 problems will have a
material adverse effect on the Company's results of operations, liquidity or
financial condition. The Company's Year 2000 project is expected to reduce
significantly the Company's level of uncertainty and the possibility of
significant or long-lasting interruptions of the Company's business operations;
however, the Company believes that it is impossible to predict all of the areas
in which material problems may arise.
The Company has been formally communicating with others with whom it does
significant business to determine their Year 2000 issues. The Company has
substantially completed its assessment of third party risks and is in the
process of confirming that third parties with whom the Company does significant
business have taken substantial steps to address potential Year 2000 problems
and that such parties will undertake additional remediation efforts to
significantly reduce the possibility of material disruptions to the Company.
There can be no assurances, however, that the systems of other companies on
which the Company's systems rely will be Year 2000 ready, that any Year 2000
problems of such companies will be timely remedied, or that the failure by
another company to be Year 2000 ready would not have a material adverse effect
on the Company.
Forward-looking statements contained in this Year 2000 section should be
read in connection with the Company's cautionary statements identifying
important risk factors that could cause the Company's actual results to differ
materially from those projected in these forward-looking statements, which
cautionary statements are contained in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998. The information contained herein is
intended to be a "Year 2000 Readiness Disclosure" as defined in the Year 2000
Information and Readiness Disclosure Act of 1998 enacted on October 19, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Certain of the Company's subsidiaries must comply with minimum capital and
surplus requirements under applicable state laws and regulations, and must have
adequate reserves for claims. Certain subsidiaries must maintain ratios of
current assets to current liabilities pursuant to certain government contracts.
The Company believes it is in compliance with these contractual and regulatory
requirements in all material respects.
The Company believes that cash from operations, existing working capital,
lines of credit, and funds from planned divestitures of business are adequate to
fund existing obligations, introduce new products and services, and continue to
develop health care-related businesses. The Company regularly evaluates cash
requirements for current operations and commitments, and for capital
acquisitions and other strategic transactions. The Company may elect to raise
additional funds for these purposes, either through additional debt or equity,
the sale of investment securities or otherwise, as appropriate.
Government health care receivables are best estimates of payments that are
ultimately collectible or payable. Since these amounts are subject to government
audit and negotiation, amounts ultimately
19
<PAGE>
collected may vary from current estimates. Additionally, the timely collection
of such receivables is also impacted by government audit and negotiation.
For the six months ended June 30, 1999, cash used by operating activities
was $147.0 million compared to $356.5 million in the comparable period of 1998.
This change was due primarily to increases in reserves for claims and other
settlements and collection of premiums receivable, which were offset by
decreases in unearned premiums, accounts payable and other liabilities. The
timing differences in Medicare and Medicaid payments also affected cash flow
from operations. Excluding these timing differences would have resulted in a
positive cash flow from operations of $32.6 million for the six months ended
June 30, 1999. Net cash provided by investing activities was $22.3 million
during the six months ended June 30, 1999 as compared to cash used in investing
activities of $79.6 million during the comparable period in 1998. This increase
was primarily due to the proceeds from the sale of certain pharmacy benefits
processing services of the Company and the Company's preferred provider
organization network subsidiary operations. Net cash used in financing
activities was $163.5 million during the six months ended June 30, 1999 as
compared to cash provided by financing activities of $127.4 million during the
comparable period in 1998. The change was primarily due to the repayment of
funds drawn under the Company's Credit Facility (as defined below).
The Company has a $1.5 billion credit facility (the "Credit Facility"), with
Bank of America as Administrative Agent for the Lenders thereto, which was
amended by a Letter Agreement dated as of March 27, 1998 and Amendments in
April, July, and November 1998 and in March 1999 with the Lenders (the
"Amendments"). All previous revolving credit facilities were terminated and
rolled into the Credit Facility on July 8, 1997. At the election of the Company,
and subject to customary covenants, loans are initiated on a bid or committed
basis and carry interest at offshore or domestic rates, at the applicable LIBOR
rate plus margin or the bank reference rate. Actual rates on borrowings under
the Credit Facility vary, based on competitive bids and the Company's unsecured
credit rating at the time of the borrowing. As of June 30, 1999, the Company was
in compliance with the financial covenants of the Credit Facility, as amended by
the Amendments. As of June 30, 1999, the maximum commitment level under the
Credit Agreement was approximately $1.4 billion, of which approximately $340
million remained available. The Credit Facility expires in July 2002, but it may
be extended under certain circumstances for two additional years.
The Company has initiated a formal plan to dispose of certain non-core
health plans included in the Company's Health Plan Services segment. It is
anticipated that the sales of these health plans will be completed during 1999.
In this regard, the Company implemented a formal plan to close the regional
processing center connected to the health plans in the Central Division. In
August 1999, the Company sold certain of the processing center facilities and
accompanying real estate. See "Item 5. Recent Development--Colorado Operations."
The closure of the remaining processing center facilities is expected to be
completed for all but the Colorado operations by the end of the third quarter of
1999. During the first quarter ended March 31, 1999, the Company recorded
restructuring and other costs of $21.1 million associated with the processing
center closure.
The Company's subsidiaries must comply with certain minimum capital
requirements under applicable state laws and regulations. The long-term portion
of principal and interest payments under the promissory notes issued to The
California Wellness Foundation in connection with the Health Net conversion to
for-profit status is subordinated to Health Net meeting tangible equity
requirements under applicable California statutes and regulations. During the
second quarter of 1999, the Company was not required to make any contributions
to its subsidiaries to meet risk-based capital requirements of the regulated
entities. The Company will, however, make contributions to its subsidiaries, as
necessary, to meet risk-based capital requirements under state laws and
regulations during the second half of 1999. The Company contributed $3.0 million
to one of its subsidiaries to meet other capital requirements during the second
quarter ended June 30, 1999. As of June 30, 1999, the Company's subsidiaries
were in compliance with minimum capital requirements.
20
<PAGE>
Legislation has been or may be enacted in certain states in which the
Company's subsidiaries operate imposing substantially increased minimum capital
and/or statutory deposit requirements for HMOs in such states. Such statutory
deposits may only be drawn upon under limited circumstances relating to the
protection of policyholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate and market risk primarily due to its
investing and borrowing activities. Market risk generally represents the risk of
loss that may result from the potential change in the value of a financial
instrument as a result of fluctuations in interest rates and in equity prices.
Interest rate risk is a consequence of maintaining fixed income investments. The
Company is exposed to interest rate risks arising from changes in the level or
volatility of interest rates, prepayment speeds and/or the shape and slope of
the yield curve. In addition, the Company is exposed to the risk of loss related
to changes in credit spreads. Credit spread risk arises from the potential that
changes in an issuer's credit rating or credit perception may affect the value
of financial instruments.
The Company has several bond portfolios to fund reserves. The Company
attempts to manage the interest rate risks related to its investment portfolios
by actively managing the asset/liability duration of its investment portfolios.
The overall goal of the investment portfolios is to support the ongoing
operations of the Company's business units. The Company's philosophy is to
actively manage assets to maximize total return over a multiple-year time
horizon, subject to appropriate levels of risk. Each business unit will have
additional requirements with respect to liquidity, current income and
contribution to surplus. The Company manages these risks by setting risk
tolerances, targeting asset-class allocations, diversifying among assets and
asset characteristics, and using performance measurement and reporting.
The Company uses a value-at-risk model to assess the market risk of its
investments. The estimation of potential losses that could arise from changes in
market conditions is typically accomplished through the use of statistical
models which seek to predict risk of loss based on historical price and
volatility patterns. The Company's measured value at risk for its investments
from continuing operations, using a 95% confidence level, was approximately $4.5
million at June 30, 1999.
The Company's calculated value-at-risk exposure represents an estimate of
reasonably possible net losses that could be recognized on its investment
portfolios assuming hypothetical movements in future market rates and are not
necessarily indicative of actual results which may occur. It does not represent
the maximum possible loss nor any expected loss that may occur, since actual
future gains and losses will differ from those estimated, based upon actual
fluctuations in market rates, operating exposures, and the timing thereof, and
changes in the Company's investment portfolios during the year. The Company,
however, believes that any loss incurred would be offset by the effects of
interest rate movements on the respective liabilities, since these liabilities
are affected by many of the same factors that affect asset performance; that is,
economic activity, inflation and interest rates, as well as regional and
industry factors.
In addition, the Company has some interest rate market risk due to its
borrowings. Notes payable, capital leases and other financing arrangements
totaled $1,091.7 million at June 30, 1999 and the related average interest rate
was 6.6% (which interest rate is subject to change pursuant to the terms of the
Credit Facility). For a description of the Credit Facility see "Liquidity and
Capital Resources." The table below presents the expected cash flows of market
risk sensitive instruments at June 30, 1999. These cash flows include both
expected principal and interest payments consistent with the terms of the
outstanding debt as of June 30, 1999 (amounts in thousands).
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 BEYOND TOTAL
--------- --------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term Borrowings Floating Rate............. 291,826 69,378 69,378 1,048,658 2,540 17,343 1,499,123
--------- --------- --------- ---------- --------- --------- ----------
</TABLE>
21
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MEDAPHIS CORPORATION
On November 7, 1996 the Company (then named Health Systems International,
Inc. ("HSI")) filed a lawsuit against Medaphis Corporation ("Medaphis") and its
former Chairman and Chief Executive Officer Randolph G. Brown, entitled HEALTH
SYSTEMS INTERNATIONAL, INC. V. MEDAPHIS CORPORATION, RANDOLPH G. BROWN AND DOES
1-50, case number BC 160414, Superior Court of California, County of Los Angeles
(the "Medaphis Action"). The lawsuit arises out of the acquisition of Health
Data Sciences Corporation ("HDS") by Medaphis. In July 1996, HSI, the owner of
1,234,544 shares of Series F Preferred Stock of HDS, representing over sixteen
percent of the total outstanding equity of HDS, voted its shares in favor of the
acquisition of HDS by Medaphis. HSI received as the result of the acquisition
976,771 shares of Medaphis common stock in exchange for its Series F Preferred
Stock. The Company alleges that Medaphis, Brown and other insiders deceived the
Company by presenting materially false financial statements and by failing to
disclose that Medaphis would shortly reveal a "write off" of up to $40 million
in reorganization costs and would lower its earnings estimate for the following
year, thereby more than halving the value of the Medaphis shares received by the
Company.
The Company and Medaphis have reached a tentative agreement in principle to
settle their legal disputes related to the Medaphis Action. The broad parameters
of the settlement provide for the Company to receive net proceeds of
approximately $25.0 million consisting of: (i) $4.5 in cash to be funded by
Medaphis' insurers, (ii) proceeds from the sale of the 976,771 shares of
Medaphis common stock currently owned by the Company and (iii) proceeds from the
sale of Medaphis common stock to be issued to the Company as part of the
settlement. In exchange, the Company and Medaphis will terminate ongoing
litigation and each will grant the other a general release. The settlement
agreement is contingent upon numerous events, including funding of insurance
proceeds, final documentation and execution of the settlement agreement, and
issuance, registration and sale of the common stock. Accordingly, there can be
no assurance that the Company and Medaphis will reach a final binding settlement
agreement. The Company and Medaphis have agreed to stay pending litigation while
they attempt to negotiate a binding settlement.
FPA MEDICAL MANAGEMENT, INC.
Since May 1998, several complaints (the "FPA Complaints") have been filed in
federal and state courts seeking an unspecified amount of damages on behalf of
an alleged class of persons who purchased shares of common stock, convertible
debentures and options to purchase common stock of FPA Medical Management, Inc.
("FPA") at various times between February 3, 1997 and May 15, 1998. The FPA
Complaints name as defendants FPA, certain of FPA's auditors, the Company and
certain of the Company's former officers. The FPA Complaints allege that the
Company and such former officers violated federal and state securities laws by
misrepresenting and failing to disclose certain information about a 1996
transaction between the Company and FPA, about FPA's business and about the
Company's 1997 sale of FPA common stock held by the Company. The Company has
filed a motion to dismiss all claims asserted against it in the consolidated
federal class actions but has not formally responded to the other complaints.
Subsequent to the Company's filing of a motion to dismiss all claims asserted
against it in the consolidated federal class action, all claims against the
Company's former officers were voluntarily dismissed from the consolidated class
actions in both federal and state court. Thereafter, all proceedings in the
consolidated federal class actions were stayed and the motion to dismiss was
denied without prejudice to renewal after the expiration of the stay. Management
believes these suits against the Company and its former officers are without
merit and intends to defend the actions vigorously.
22
<PAGE>
MISCELLANEOUS PROCEEDINGS
The Company and certain of its subsidiaries are also parties to various
legal proceedings, many of which involve claims for coverage encountered in the
ordinary course of its business. Based in part on advice from litigation counsel
to the Company and upon information presently available, management of the
Company is of the opinion that the final outcome of all such proceedings should
not have a material adverse effect upon the Company's results of operations or
financial condition.
ITEM 2. CHANGES IN SECURITIES
REVOLVING CREDIT FACILITY
The Company has an unsecured, five-year $1.5 billion revolving credit
facility pursuant to a Credit Agreement dated July 8, 1997 (the "Credit
Agreement") with the banks identified in the Credit Agreement (the "Banks") and
Bank of America National Trust and Savings Association ("Bank of America") as
Administrative Agent. All previous revolving credit facilities were terminated
and rolled into the Credit Agreement. The Credit Agreement contains customary
representations and warranties, affirmative and negative covenants, and events
of default. Specifically, Section 7.11 of the Credit Agreement provides that the
Company and its subsidiaries may, so long as no event of default exists: (i)
declare and distribute stock as a dividend; (ii) purchase, redeem, or acquire
its stock, options, and warrants with the proceeds of concurrent public
offerings; and (iii) declare and pay dividends or purchase, redeem, or otherwise
acquire its capital stock, warrants, options, or similar rights with cash
subject to certain specified limitations.
Under the Credit Agreement, as amended pursuant to a Letter Agreement dated
as of March 27, 1998, the First Amendment and Waiver to Credit Agreement dated
as of April 6, 1998, the Second Amendment to Credit Agreement dated as of July
31, 1998, the Third Amendment to Credit Agreement dated as of November 6, 1998
and the Fourth Amendment of Credit Agreement dated as of March 26, 1999
(collectively, the "Amendments") with the Banks, the Company is: (i) obligated
to maintain certain covenants keyed to the Company's financial condition and
performance (including a Total Leverage Ratio and Fixed Charge Ratio); (ii)
obligated to limit liens; (iii) subject to customary covenants, including (A)
disposition of assets only in the ordinary course and generally at fair value
and (B) restrictions on acquisitions, mergers, consolidations, loans, leases,
joint ventures, contingent obligations and certain transactions with affiliates;
(iv) permitted to sell the Company's workers' compensation insurance business,
provided that the net proceeds shall be applied towards repayment of the
outstanding loans under the Credit Agreement (which sale the Company completed
on December 10, 1998); and (v) permitted to incur additional indebtedness in an
aggregate amount not to exceed $1,000,000,000 upon certain terms and conditions.
The Credit Agreement also provides for mandatory prepayment of the outstanding
loans under the Credit Agreement with a certain portion of the proceeds from the
issuance of such indebtedness and from sales of assets, resulting in a permanent
reduction of the aggregate amount of commitments under the Credit Agreement by
the amount so prepaid. As of June 30, 1999, the maximum commitment level
permitted under the Credit Agreement was approximately $1.4 billion, of which
approximately $340 million remained available. The Amendments also provided for
an increase in the interest and facility fees under the Credit Agreement.
SHAREHOLDER RIGHTS PLAN
On May 20, 1996, the Board of Directors of the Company declared a dividend
distribution of one right (a "Right") for each outstanding share of the
Company's Class A Common Stock and Class B Common Stock (collectively, the
"Common Stock"), to stockholders of record at the close of business on July 31,
1996 (the "Record Date"). The Board of Directors of the Company also authorized
the issuance of one Right for each share of Common Stock issued after the Record
Date and prior to the earliest of the Distribution Date (as defined below), the
redemption of the Rights, and the expiration of the Rights, and in certain other
circumstances. Rights will attach to all Common Stock certificates representing
shares then
23
<PAGE>
outstanding and no separate Rights certificates will be distributed. Subject to
certain exceptions contained in the Rights Agreement dated as of June 1, 1996 by
and between the Company and Harris Trust and Savings Bank, as Rights Agent (the
"Rights Agreement"), the Rights will separate from the Common Stock in the event
any person acquires 15% or more of the outstanding Class A Common Stock, the
Board of Directors of the Company declares a holder of 10% or more to the
outstanding Class A Common Stock to be an "Adverse Person," or any person
commences a tender offer for 15% or more of the Class A Common Stock (each event
causing a "Distribution Date").
Except as set forth below and subject to adjustment as provided in the
Rights Agreement, each Right entitles its registered holder, upon the occurrence
of a Distribution Date, to purchase from the Company one one-thousandth of a
share of Series A Junior Participating Preferred Stock at a price of $170.00 per
one-thousandth share. However, in the event any person acquires or commences a
tender offer for 15% or more of the outstanding Class A Common Stock, or the
Board of Directors of the Company declares a holder of 10% or more of the
outstanding Class A Common Stock to be an "Adverse Person," the Rights (subject
to certain exceptions contained in the Rights Agreement) will instead become
exercisable for Class A Common Stock having a market value at such time equal to
$340.00. The Rights are redeemable under certain circumstances at $.01 per Right
and will expire, unless earlier redeemed, on July 31, 2006.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as Exhibit 99.1 to the Company's Registration Statement on
Form 8-A (File No. 001-12718). In connection with its execution of the Merger
Agreement for the merger transaction involving Foundation Health Corporation and
Health Systems International, Inc., the Company's predecessors, the Company
entered into Amendment No. 1 (the "Rights Amendment") to the Rights Agreement to
exempt the Merger Agreement and related transactions from triggering the Rights.
In addition, the Rights Amendment modifies certain terms of the Rights Agreement
applicable to the determination of certain "Adverse Persons," which
modifications became effective upon consummation of the transactions provided
for under the Merger Agreement. This summary description of the Rights does not
purport to be complete and is qualified in its entirely by reference to the
Rights Agreement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 6, 1999, the Company held its 1999 Annual Meeting of Stockholders
(the "Annual Meeting"). At the Annual Meeting, the Company's stockholders voted
upon proposals to (i) elect four directors for a term of three years ("Proposal
1") and (ii) ratify the selection of Deloitte & Touche LLP as the Company's
independent public accountants for the year ending December 31, 1999 ("Proposal
2"). The following provides voting information for all matters voted upon at the
Annual Meeting, and includes a separate tabulation with respect to each nominee
for director:
PROPOSAL 1
<TABLE>
<CAPTION>
ELECTION OF DIRECTORS VOTES FOR VOTES AGAINST VOTES WITHHELD
- ------------------------------------------------ ------------- ------------------- --------------
<S> <C> <C> <C>
J. Thomas Bouchard.............................. 105,451,415 0 939,635
Thomas T. Farley................................ 105,414,635 0 976,415
Patrick Foley................................... 105,411,109 0 979,941
Richard J. Stegemeier........................... 105,454,244 0 936,806
</TABLE>
24
<PAGE>
Each of Messrs. Bouchard, Farley, Foley and Stegemeier was elected as a
Class III director for a three-year term at the Annual Meeting. Other directors
whose term of office as directors continued after the Annual Meeting were: Gov.
George Deukmejian, Adm. Earl B. Fowler, Jay M. Gellert, Roger Greaves, Richard
W. Hanselman, and Raymond S. Troubh.
PROPOSAL 2
With respect to the ratification of the selection of Deloitte & Touche LLP
as the Company's independent public accountants for the year ending December 31,
1999, 106,320,573 votes were cast in favor, 44,080 votes were cast against and
26,397 votes were withheld for such proposal.
In total, 117,200,785 shares of Class A Common Stock were eligible to vote
at the Annual Meeting, 106,391,050 shares were voted at the Annual Meeting and
10,809,735 shares were unvoted at the Annual Meeting.
No other matters were submitted to a vote of the Company's security holders
during the quarter ended June 30, 1999.
ITEM 5. OTHER INFORMATION
CAUTIONARY STATEMENTS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company has previously filed with its Annual
Report on Form 10-K for the year ended December 31, 1998 certain cautionary
statements identifying important risk factors that could cause the Company's
actual results to differ materially from those projected in forward-looking
statements of the Company made by or on behalf of the Company.
The Company wishes to caution readers that these factors, among others,
could cause the Company's actual financial or enrollment results to differ
materially from those expressed in any projected, estimated or forward-looking
statements relating to the Company. The factors should be considered in
conjunction with any discussion of operations or results by the Company or its
representatives, including any forward-looking discussion, as well as comments
contained in press releases, presentations to securities analysts or investors,
or other communications by the Company.
In making these statements, the Company was not and is not undertaking to
address or update each factor in future filings or communications regarding the
Company's business or results, and is not undertaking to address how any of
these factors may have caused changes to discussions or information contained in
previous filings or communications. In addition, certain of these matters may
have affected the Company's past results and may affect future results.
RECENT DEVELOPMENTS
FOHP. In 1997, the Company purchased convertible debentures (the "FOHP
Debentures") of FOHP, Inc., a New Jersey corporation ("FOHP"), in the aggregate
principal amount of approximately $80.7 million and converted approximately
$70.6 million principal amount of the FOHP Debentures into shares of Common
Stock of FOHP. As a result, the Company owned approximately 98% of the
outstanding shares of FOHP common stock.
Effective December 31, 1997, the Company purchased nonconvertible debentures
in the amount of $24 million from FOHP. The debentures mature on December 31,
2002. The debentures were issued to the Company in consideration for additional
capital contributions made by the Company pursuant to the Amended and Restated
Securities Purchase Agreement, dated February 10, 1997, and as amended March 13,
1997, among the Company, FOHP, and First Option Health Plan of New Jersey, Inc.
("FOHP-NJ"), a wholly-owned subsidiary of FOHP.
25
<PAGE>
Pursuant to an Agreement and Plan of Merger dated as of October 26, 1998,
Physicians Health Services of New Jersey, Inc., a New Jersey HMO wholly-owned by
the Company, merged with and into FOHP-NJ on January 1, 1999 and FOHP-NJ changed
its name to Physicians Health Services of New Jersey, Inc. ("PHS-NJ"). On
December 31, 1998, the Company converted $1,197,183 principal amount of its
remaining convertible debentures of FOHP into common stock of FOHP. As a result,
the Company owned approximately 99.6% of the outstanding equity of FOHP. The
minority shareholders of FOHP were physicians, hospitals and other health care
providers.
Pursuant to an Agreement and Plan of Merger dated as of November 16, 1998,
which was approved by the stockholders of FOHP at a special meeting held July
29, 1999, a wholly-owned subsidiary of the Company merged into FOHP on July 30,
1999 and FOHP became a wholly-owned subsidiary of the Company. In connection
with the merger, the former minority shareholders of FOHP are entitled to either
$0.25 per share (the value per FOHP share as of December 31, 1998 as determined
by an outside appraiser) or payment rights which entitle the holders to receive
not less than $15.00 per payment right on or about July 1, 2001, provided that,
with respect to the payment rights (i) for provider shareholders, other than
hospitals, such shareholder must remain a provider of PHS-NJ until July 1, 2001
and agree to remain a provider to PHS-NJ from July 1, 2001 until December 31,
2001, and a specified number of hospital shareholders must not leave the
provider network prior to December 31, 2001 for such provider shareholder to be
eligible to receive such payment, (ii) for hospital shareholders, such payment
rights are subject to the same foregoing conditions and additional conditions
relating to reimbursement rates, enrollment of hospital employees in PHS-NJ
health plans, and payments of premiums to PHS-NJ for such hospital shareholder
to be eligible to receive such payment and (iii) for provider shareholders,
other than hospitals, such shareholder will be entitled to receive additional
consideration of $2.25 per payment right and a pro rata portion of a bonus to be
funded by monies forfeited by hospital shareholders, provided that PHS-NJ
achieves certain annual returns on common equity and certain of the foregoing
conditions are met.
QUALMED PLANS FOR HEALTH OF PENNSYLVANIA, INC. Effective December 31, 1998,
the Company purchased the minority interests in QualMed Plans for Health of
Pennsylvania, Inc. ("QualMed-PA"), a then majority-owned subsidiary of the
Company, for approximately $2 million. Previously, the Company owned
approximately 83% of the common stock of QualMed-PA. In January 1999, the
Company transferred certain of the assets of QualMed-PA, including the assets
relating to its preferred provider organization ("MaxNet-Registered Trademark-")
and managed workers' compensation ("CompTek-Registered Trademark-") business and
operations, to Preferred Health Network, Inc., a wholly-owned subsidiary of the
Company that was recently sold as described below.
MEDPARTNERS PROVIDER NETWORK, INC. On March 11, 1999, MedPartners Provider
Network, Inc. ("MPN"), a Knox-Keene licensed entity and a subsidiary of
MedPartners, Inc., a publicly-held physician practice and pharmacy benefit
management company, was placed into conservatorship by the State of California
under Section 1393(c) of the California Health and Safety Code. The conservator
immediately filed a petition under Chapter 11 of the Bankruptcy Code on behalf
of MPN. MPN and various provider groups and clinics affiliated with MedPartners,
Inc. provide health care services to approximately 215,000 enrollees of the
Company's Health Net HMO subsidiary.
The Company continues to monitor the situation closely and has been involved
in discussions with various parties to attempt to maintain continuity of care
and to minimize the impact that MPN's conservatorship and bankruptcy could have
on affected Health Net members. The Company understands from various public
statements made by MedPartners, Inc. that it intends to divest its California
clinic operations.
MedPartners, Inc., MPN and the State of California executed an Amended and
Restated Operations and Settlement Agreement dated as of June 16, 1999 (the "O&S
Agreement"), containing the basic principles for an orderly transition of the
California operations of MedPartners, Inc., and the resolution of unpaid
provider claims. A Bankruptcy Court Order approving the O&S Agreement was
obtained by MPN
26
<PAGE>
on July 19, 1999. Although court approval of the O&S Agreement has been
obtained, a number of conditions subsequent and third party consents required by
such agreement are yet to occur or be obtained before the transactions reflected
therein will become effective. MedPartners, Inc. is also pursuing the sale of
all of its physician management operations in California. As of August 1, 1999,
sales have been consummated on operations covering approximately 32% of the
total number of members of the Company associated with MedPartners, Inc.'s
physician groups. Sales for the remainder of the physician groups are pending.
At this time, no assurances can be given that a final settlement agreement
on the terms reflected in the O&S Agreement will become effective or be
implemented or that sales for the remainder of MedPartners, Inc.'s physician
groups will be consummated. In the event of a final implementation of a
settlement on the terms reflected in the O&S Agreement, the Company believes
that the bankruptcy of MPN will not have a material adverse effect on the
Company's California operations. If the settlement reflected in the O&S
Agreement is not fully implemented, such failure could have a material adverse
effect on the Company's California operations in the event the Company is
ultimately held liable to pay unpaid provider claims and/or the Company is
unable to quickly transition its remaining members covered by MPN to alternate
providers. However, the Company has developed and is implementing various
transitional strategies that it believes will reduce any such adverse impact in
the event a settlement on the terms reflected in the O&S Agreement is not fully
implemented on a timely basis or at all.
INSURANCE SUBSIDIARIES. The Company is in the process of restructuring its
insurance subsidiaries to merge Foundation Health National Life Insurance
Company ("FHNL") and Foundation Health Systems Life and Health Insurance Company
("FHS Life") under a holding company subsidiary of the Company, FHS Life
Holdings Company, Inc. The merger has received regulatory approval from each
merging entity's state of incorporation.
LOUISIANA, OKLAHOMA AND TEXAS HMO OPERATIONS. On April 30, 1999, the
Company completed the sale of its HMO operations in the states of Texas,
Louisiana and Oklahoma to AmCareco, Inc. As part of the transaction, the Company
received convertible preferred stock of the buyer and cash in excess of certain
statutory surplus and minimum working capital requirements of the plans sold.
The transaction is subject to certain post-closing adjustments and affiliates of
the Company will continue to provide certain administrative, behavioral health
and other services to such HMO operations for a transitionary period pursuant to
separate agreements.
PHARMACY BENEFITS PROCESSING SERVICES. On March 31, 1999, the Company
completed the sale to Advance Paradigm of the capital stock of Foundation Health
Pharmaceutical Services, Inc., and certain pharmacy benefit processing services
of Integrated Pharmaceutical Services, Inc. for approximately $65.0 million in
cash. In addition, as part of the transaction, Advance Paradigm will provide to
the Company at competitive rates claims processing, retail network management
and payment of claims pharmacy benefits services under a services agreement.
Advance Paradigm will also provide pharmacy mail service to the Company's Health
Plan Divisions. For a period of five years, the Company may not compete with
respect to such services in any market in which Advance Paradigm conducts
business, subject to certain exceptions.
GEM INSURANCE COMPANY. Since October of 1997, Gem Insurance Company
("Gem"), a subsidiary of the Company, has implemented a restructuring plan to
reduce operating losses and its in-force insurance risk. In 1997, Gem initiated
a withdrawal from the Nevada insurance markets, and began restructuring its
insurance products in Utah and then in certain other markets. Gem also reduced
commissions to market-level rates and terminated certain general agents. Gem
continued to implement such restructuring plan in 1998. As a result, the number
of Gem's insureds dropped from over 100,000 at the start of 1998 to
approximately 1,100 at June 30, 1999. Gem has filed notices of intention to
withdraw from Nebraska and the small group market in Colorado. Currently,
Foundation Health Systems Life and Health Insurance Company, a subsidiary of the
Company, services Gem's insureds through an administrative services
27
<PAGE>
agreement between the companies. The Company is reviewing the possibility of
winding up the operations of Gem or merging such operations into another
insurance subsidiary of the Company. Upon completion of its current withdrawals,
Gem will be licensed in only five states.
COLORADO OPERATIONS. In March 1999, the Company announced it had entered
into a letter of intent to sell the capital stock of QualMed Plans for Health of
Colorado, Inc., the Company's HMO subsidiary in the state of Colorado. As
previously disclosed, consummation of the sale was subject to executing a
definitive agreement mutually satisfactory to the parties and satisfaction of
all conditions to be set forth therein, including obtaining regulatory
approvals. No such definitive agreement has yet been executed, and the Company
continues to consider various alternatives to wind-down its business in
Colorado. In this connection, in August 1999, the Company sold certain of its
regional processing facilities and accompanying real estate in Pueblo, Colorado,
including certain equipment and other assets located at the facilities, to the
Pueblo Economic Development Company and The TPA, Inc. The closure of the
remaining processing facilities is expected to occur for all but the Colorado
operations by the end of the third quarter of 1999.
NEW MEXICO OPERATIONS. In March 1999, the Company entered into a definitive
agreement to sell the capital stock of QualMed Plans for Health, Inc., the
Company's HMO subsidiary in the state of New Mexico, to Health Care Horizons,
Inc. Although the Company has entered into a definitive agreement for the
foregoing sale, consummation of the sale is subject to various conditions and
certain regulatory approvals. A public hearing on the transaction has been set
for August 30 and 31, 1999, and the Company anticipates closing the sale by the
end of the third quarter of 1999.
PREFERRED HEALTH NETWORK, INC. In May 1999, the Company sold the capital
stock of Preferred Health Network, Inc., its PPO network subsidiary ("PHN"), to
Beyond Benefits, Inc. PHN and the Company, or certain affiliates thereof,
entered into agreements at closing to provide each other with certain continued
access to each other's networks.
UTAH OPERATIONS. In July 1999, the Company entered into a definitive
agreement to sell the outstanding capital stock of Intergroup of Utah, Inc., the
Company's HMO subsidiary in the state of Utah, to Altius Health Plans Inc.
Although the Company has entered into a definitive agreement for the foregoing
sale, consummation of the sale is subject to various conditions and certain
regulatory approvals. The Company anticipates closing the sale by the end of
1999.
SOUTHERN CALIFORNIA HOSPITALS. In July 1999, the Company entered into a
definitive agreement to sell East Los Angeles Doctors Hospital and Memorial
Hospital of Gardena, two Southern California hospitals, to HealthPlus+ Corp.
Although the Company has entered into a definitive agreement for the foregoing
sale, consummation of the sale is subject to various conditions and certain
regulatory approvals. The Company anticipates closing the sale by the end of
1999. Certain subsidiaries of the Company will maintain contractual arrangements
with the hospitals following the sale.
OTHER POTENTIAL DIVESTITURES. The Company continues to evaluate the
profitability realized or likely to be realized by its existing businesses and
operations, and is reviewing from a strategic standpoint which of such
businesses or operations should be divested.
DIRECTOR AND EXECUTIVE OFFICER CHANGES
In February 1999, the Board of Directors of the Company elected Jay M.
Gellert, the Company's President and Chief Executive Officer, to fill a vacancy
on the Board of Directors. Effective March 1, 1999, Malik M. Hasan, M.D.,
resigned from the Company's Board of Directors. Accordingly, there currently
exists a vacancy on the Board of Directors. 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
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<PAGE>
Fifth Amended and Restated By-Laws. In May 1999, the Board of Directors elected
Richard W. Hanselman as Chairman of the Board of Directors.
In April 1999, Karin D. Mayhew became Senior Vice President Human Resources
of the Company. In May 1999, Ross D. Henderson, M.D. became Senior Vice
President and Chief Medical Officer of the Company. Dr. Henderson succeeded Dale
T. Berkbigler, M.D. in such position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this Quarterly Report on Form
10-Q or are incorporated herein by reference:
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger, dated October 1, 1996, by and among Health Systems
International, Inc., FH Acquisition Corp. and Foundation Health Corporation
(filed as Exhibit 2.5 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, which is incorporated by reference herein).
2.2 Agreement and Plan of Merger, dated May 8, 1997, by and among the Company, PHS
Acquisition Corp. and Physicians Health Services, Inc. (filed as Exhibit 2.2 to
the Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1997, which is incorporated by reference herein).
2.3 Amendment No. 1 to Agreement and Plan of Merger, dated October 20, 1997, by and
among the Company, PHS Acquisition Corp. and Physicians Health Services, Inc.
(filed as Exhibit 2.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997, which is incorporated by reference herein).
3.1 Fourth Amended and Restated Certificate of Incorporation of the Registrant
(filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8 (File
No. 333-24621), which is incorporated by reference herein).
3.2 Fifth Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997,
which is incorporated by reference herein).
*3.3 Certain Amendments to the Fifth Amended and Restated Bylaws of the Registrant, a
copy of which is filed herewith.
4.1 Form of Class A Common Stock Certificate (included as Exhibit 4.2 to the
Company's Registration Statements on Forms S-1 and S-4 (File nos. 33-72892 and
33-72892-01, respectively) which is incorporated by reference herein).
4.2 Form of Class B Common Stock Certificate (included as Exhibit 4.3 to the
Company's Registration Statements on Forms S-1 and S-4 (File nos. 33-72892 and
33-72892-01, respectively) which is incorporated by reference herein).
4.3 Rights Agreement dated as of June 1, 1996 by and between the Company and Harris
Trust and Savings Bank, as Rights Agent (filed as Exhibit 99.1 to the Company's
Registration Statement on Form 8-A (File No. 001-12718), which is incorporated
by reference herein).
4.4 First Amendment to the Rights Agreement dated as of October 1, 1996, by and
between the Company and Harris Trust and Savings Bank, as Rights Agent (filed as
Exhibit 10.40 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, which is incorporated by reference herein).
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10.1 Letter Agreement dated June 1, 1998 between The California Wellness Foundation
and the Company (filed as Exhibit 10.75 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998, which is incorporated by
reference herein).
10.2 Employment Letter Agreement between the Company and Karin D. Mayhew dated
January 22, 1999 (filed as Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999, which is incorporated by
reference herein).
10.3 Employment Letter Agreement between the Company and Ross D. Henderson dated
April 29, 1999 (filed as Exhibit 10.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999, which is incorporated by reference
herein).
10.4 Letter Agreement dated June 25, 1998 between B. Curtis Westen and the Company
(filed as Exhibit 10.73 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998, which is incorporated by reference herein).
10.5 Employment Letter Agreement dated July 3, 1996 between Jay M. Gellert and the
Company (filed as Exhibit 10.37 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996, which is incorporated by reference
herein).
10.6 Amended Letter Agreement between the Company and Jay M. Gellert dated as of
August 22, 1997 (filed as Exhibit 10.69 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997, which is incorporated by reference
herein).
10.7 Employment Letter Agreement between the Company and Dale Terrell dated December
31, 1997 (filed as Exhibit 10.71 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, which is incorporated by reference herein).
10.8 Employment Letter Agreement between the Company and Steven P. Erwin dated March
11, 1998 (filed as Exhibit 10.72 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, which is incorporated by reference herein).
10.9 Employment Agreement between the Company and Maurice Costa dated December 31,
1997 (filed as Exhibit 10.71 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, which is incorporated by reference herein).
10.10 Employment Letter Agreement between Foundation Health Corporation and Gary S.
Velasquez dated May 1, 1996 (filed as Exhibit 10.13 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998, which is incorporated
by reference herein).
10.11 Employment Agreement between Foundation Health Corporation and Edward J. Munno
dated November 8, 1993 (filed as Exhibit 10.14 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, which is incorporated by
reference herein).
10.12 Amendment Number One to Employment Agreement between Foundation Health
Corporation and Edward J. Munno dated May 1, 1996 (filed as Exhibit 10.15 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1998, which
is incorporated by reference herein).
10.13 Employment Letter Agreement between the Company and Cora Tellez dated November
16, 1998 (filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, which is incorporated by reference herein).
10.14 Employment Letter Agreement between the Company and Karen Coughlin dated March
12, 1998 (filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, which is incorporated by reference herein).
10.15 Employment Letter Agreement between the Company and J. Robert Bruce dated
September 22, 1998 (filed as Exhibit 10.18 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, which is incorporated by
reference herein).
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10.16 Waiver and Release of Claims between the Company and Robert Natt (filed as
Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, which is incorporated by reference herein).
10.17 Form of Severance Payment Agreement dated December 4, 1998 by and between the
Company and various of its executive officers (filed as Exhibit 10.21 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1998, which
is incorporated by reference herein).
10.18 Early Retirement Agreement dated August 6, 1998 between the Company and Malik M.
Hasan, M.D. (filed as Exhibit 10.77 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998, which is incorporated by reference
herein).
10.19 Severance Payment Agreement, dated as of April 25, 1994, among the Company,
QualMed, Inc. and B. Curtis Westen (filed as Exhibit 10.10 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994, which is
incorporated by reference herein).
10.20 Severance Payment Agreement between the Company and J. Robert Bruce dated
September 15, 1998 (filed as Exhibit 10.23 to the Company's Form 10-K for the
year ended December 31, 1998, which is incorporated by reference herein).
10.21 Severance Payment Agreement between the Company and Maurice Costa dated April 6,
1998 (filed as Exhibit 10.24 to the Company's Form 10-K for the year ended
December 31, 1998, which is incorporated by reference herein).
*10.22 Waiver and Release of Claims between the Company and Dale T. Berkbigler, M.D.
dated as of June 30, 1999, a copy of which is filed herewith.
10.23 The Company's Second Amended and Restated 1991 Stock Option Plan (filed as
Exhibit 10.30 to Registration Statement on Form S-4 (File No. 33-86524), which
is incorporated by reference herein).
10.24 The Company's Second Amended and Restated Non-Employee Director Stock Option
Plan (filed as Exhibit 10.31 to Registration Statement on Form S-4 (File No.
33-86524), which is incorporated by reference herein).
10.25 The Company's Employee Stock Purchase Plan (filed as Exhibit 10.33 to the
Company's Registration Statements on Forms S-1 and S-4 (File nos. 33-72892 and
33-72892-01, respectively), which is incorporated by reference herein).
10.26 The Company's Performance-Based Annual Bonus Plan (filed as Exhibit 10.35 to
Registration Statement on Form S-4 (File No. 33-86524), which is incorporated by
reference herein).
10.27 Deferred Compensation Agreement dated as of March 3, 1995, by and among Malik M.
Hasan, M.D., the Company and the Compensation and Stock Option Committee of the
Board of Directors of the Company (filed as Exhibit 10.31 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994, which is
incorporated by reference herein).
10.28 Trust Agreement for Deferred Compensation Arrangement for Malik M. Hasan, M.D.,
dated as of March 3, 1995, by and between the Company and Norwest Bank Colorado
N.A. (filed as Exhibit 10.32 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994, which is incorporated by reference herein).
10.29 The Company's Deferred Compensation Plan Trust Agreement dated as of September
1, 1998 between the Company and Union Bank of California (filed as Exhibit 10.31
to the Company's Form 10-K for the year ended December 31, 1998, which is
incorporated by reference herein).
10.30 The Company's 401(k) Associate Savings Plan (filed as Exhibit 4.5 to the
Company's Registration Statement on Form S-8 filed on March 31, 1998, which is
incorporated by reference herein).
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10.31 The Company's 1997 Stock Option Plan (filed as Exhibit 10.45 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, which is
incorporated by reference herein).
10.32 The Company's 1998 Stock Option Plan (filed as Exhibit 4.5 to the Company's
Registration Statement on Form S-8 filed on December 4, 1998, which is
incorporated by reference herein).
10.33 The Company's Employee Stock Purchase Plan (filed as Exhibit 10.47 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997,
which is incorporated by reference herein).
10.34 The Company's Performance-Based Annual Bonus Plan (filed as Exhibit 10.48 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997,
which is incorporated by reference herein).
10.35 The Company's Third Amended and Restated Non-Employee Director Stock Option Plan
(filed as Exhibit 10.46 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, which is incorporated by reference herein).
10.36 The Company's Supplemental Executive Retirement Plan effective as of January 1,
1996 (filed as Exhibit 10.65 to the Company's Form 10-K for the year ended
December 31, 1998, which is incorporated by reference herein).
10.37 The Company's Deferred Compensation Plan effective as of May 1, 1998 (filed as
Exhibit 10.66 to the Company's Form 10-K for the year ended December 31, 1998,
which is incorporated by reference herein).
10.38 The Company's 1995 Stock Appreciation Rights Plan (filed as Exhibit 10.12 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1995, which is incorporated by reference herein).
10.39 Managed Health Network, Inc. Incentive Stock Option Plan (filed as Exhibit 4.8
to the Company's Registration Statement on Form S-8 (File No. 333-24621), which
is incorporated by reference herein).
10.40 Managed Health Network, Inc. Amended and Restated 1991 Stock Option Plan (filed
as Exhibit 4.9 to the Company's Registration Statement on Form S-8 (File No.
333-24621), which is incorporated by reference herein).
10.41 1990 Stock Option Plan of Foundation Health Corporation (filed as Exhibit 4.5 to
the Company's Registration Statement on Form S-8 (File No. 333-24621), which is
incorporated by reference herein).
10.42 FHC Directors Retirement Plan (filed as an exhibit to FHC's Form 10-K for the
year ended June 30, 1994 filed with the Commission on September 24, 1994, which
is incorporated by reference herein).
10.43 Participation Agreement dated as of May 25, 1995 among Foundation Health Medical
Services, as Construction Agent and Lessee, FHC, as Guarantor, First Security
Bank of Utah, N.A., as Owner Trustee, Sumitomo Bank Leasing and Finance, Inc.,
The Bank of Nova Scotia and NationsBank of Texas, N.A., as Holders and
NationsBank of Texas, N.A., as Administrative Agent for the Lenders; and
Guaranty Agreement dated as of May 25, 1995 by FHC for the benefit of First
Security Bank of Utah, N.A. (filed as an exhibit to FHC's Form 10-K for the year
ended June 30, 1995, filed with the Commission on September 27, 1995, which is
incorporated by reference herein).
10.44 FHC's Deferred Compensation Plan, as amended and restated (filed as Exhibit
10.99 to FHC's Form 10-K for the year ended June 30, 1995, which is incorporated
by reference herein).
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10.45 FHC's Supplemental Executive Retirement Plan, as amended and restated (filed as
Exhibit 10.100 to FHC's Form 10-K for the year ended June 30, 1995, which is
incorporated by reference herein).
10.46 FHC's Executive Retiree Medical Plan, as amended and restated (filed as Exhibit
10.101 to FHC's Form 10-K for the year ended June 30, 1995, which is
incorporated by reference herein).
10.47 Stock and Note Purchase Agreement by and between FHC, Jonathan H., Schoff, M.D.,
FPA Medical Management, Inc., FPA Medical Management of California, Inc. and FPA
Independent Practice Association dated as of June 28, 1996 (filed as Exhibit
10.109 to FHC's Annual Report on Form 10-K for the year ended June 30, 1996,
which is incorporated by reference herein).
10.48 Credit Agreement dated July 8, 1997 among the Company, the banks identified
therein and Bank of America National Trust and Savings Association in its
capacity as Administrative Agent (providing for an unsecured $1.5 billion
revolving credit facility) (filed as Exhibit 10.23 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997, which is incorporated
by reference herein).
10.49 Guarantee Agreement dated July 8, 1997 between the Company and First Security
Bank, National Association (filed as Exhibit 10.24 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997, which is
incorporated by reference herein).
10.50 First Amendment and Waiver to Credit Agreement dated April 6, 1998 among the
Company, Bank of America National Trust and Savings Association and the Banks
(as defined therein) (filed as Exhibit 10.64 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998, which is incorporated by
reference herein).
10.51 Second Amendment to Credit Agreement dated July 31, 1998 among the Company, Bank
of America National Trust and Savings Association and the Banks (as defined
therein) (filed as Exhibit 10.65 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998, which is incorporated by reference herein).
10.52 Third Amendment to Credit Agreement, dated November 6, 1998, among the Company,
Bank of America National Trust and Savings Association and the Banks (as defined
therein) (filed as Exhibit 10.65 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998, which is incorporated by reference
herein).
10.53 Fourth Amendment to Credit Agreement, dated as of March 26, 1998, among the
Company, Bank of America National Trust and Savings Association and the Banks,
as defined therein (filed as Exhibit 10.64 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, which is incorporated by
reference herein).
10.55 Form of Credit Facility Commitment Letter, dated March 27, 1998, between the
Company and the Majority Banks (as defined therein) (filed as Exhibit 10.70 to
the Company's Annual Report on Form 10-K for the year ended December 31, 1997,
which is incorporated by reference herein).
10.56 Registration Rights Agreement dated as of March 2, 1995 between the Company and
The California Wellness Foundation (filed as Exhibit No. 28.2 to the Company's
Current Report on Form 8-K dated March 2, 1995, which is incorporated by
reference herein).
10.57 Office Lease, dated as of January 1, 1992, by and between Warner Properties III
and Health Net (filed as Exhibit 10.23 to the Company's Registration Statements
on Forms S-1 and S-4 (File Nos. 33-72892 and 33-72892-01, respectively), which
is incorporated by reference herein).
10.58 Lease Agreement between HAS-First Associates and FHC dated August 1, 1998 and
form of amendment thereto (filed as an exhibit to FHC's Registration Statement
on Form S-1 (File No. 33-34963), which is incorporated by reference herein).
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10.59 Asset Purchase Agreement dated December 31, 1998 by and between the Company and
Access Health, Inc. (filed as Exhibit 10.62 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, which is incorporated by
reference herein).
10.60 Purchase Agreement dated February 26,1999 by and among the Company, Foundation
Health Pharmaceutical Services, Inc., Integrated Pharmaceutical Services, Inc.,
and Advance Paradigm, Inc. (filed as Exhibit 10.63 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998, which is incorporated
by reference herein).
11.1 Statement relative to computation of per share earnings of the Company (included
in the Notes to the Condensed Consolidated Financial Statements contained in
this Quarterly Report on Form 10-Q).
*27.1 Financial Data Schedule for the second quarter ended June 30, 1999, a copy of
which has been filed with the EDGAR version of this filing.
</TABLE>
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* A copy of the Exhibit is filed herewith.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed by the Company during the
quarterly period ended June 30, 1999.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
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FOUNDATION HEALTH SYSTEMS, INC.
(REGISTRANT)
By: /s/ JAY M. GELLERT
-----------------------------------------
Jay M. Gellert
Date: August 16, 1999 PRESIDENT AND CHIEF EXECUTIVE OFFICER
By: /s/ STEVEN P. ERWIN
-----------------------------------------
Steven P. Erwin
Date: August 16, 1999 EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
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35
<PAGE>
EXHIBIT 3.3
AMENDMENT ONE TO FIFTH AMENDED AND RESTATED BY-LAWS
OF FOUNDATION HEALTH SYSTEMS, INC.
On February 4, 1999, the Board of Directors of Foundation Health
Systems, Inc. (the "Corporation") voted to amend the Fifth Amended and
Restated By-Laws (the "By-Laws") of the Corporation as follows:
Section 2 of Article III of the By-Laws was amended by adding the
following to the end thereof:
"Directors shall be deemed to have retired and resigned from
the Board of Directors effective immediately prior to the first
annual meeting of stockholders of the Corporation occurring
after such Director attains seventy-two years of age, provided,
however, that members of the Board of Directors on February 4,
1999 shall be deemed to have retired and resigned from the
Board of Directors effective upon the date of the first annual
meeting of stockholders of the Corporation occurring after such
Director attains seventy-five years of age."
<PAGE>
AMENDMENT TWO TO FIFTH AMENDED AND RESTATED BY-LAWS
OF FOUNDATION HEALTH SYSTEMS, INC.
On May 5, 1999, the Board of Directors of Foundation Health Systems,
Inc. (the "Corporation") voted to amend the Fifth Amended and Restated
By-Laws of the Corporation, as amended by Amendment One to Fifth Amended and
Restated By-Laws dated February 4, 1999 (as amended, the "By-Laws"), as
follows:
Section 5 of Article IV of the By-Laws was amended so that such Section
5 reads in its entirety as follows:
"Section 5 FINANCE COMMITTEE. The Finance Committee shall have the
following responsibilities:
(a) To review the Corporation's investment policies and
guidelines;
(b) To monitor performance of the Corporation's investment
portfolio;
(c) To review the Corporation's financial structure and
operations in light of the Corporation's long-term
objectives and to coordinate such review with the Audit
Committee;
(d) To review and recommend to the Board of Directors
appropriate action on proposed acquisitions and
divestitures;
(e) To establish appropriate authority levels for various
officials of the Corporation with respect to mergers and
acquisitions, divestitures and capital expenditures; and
(f) To review and recommend appropriate action with respect to
the Corporation's short- and long-term debt structure."
<PAGE>
EXHIBIT 10.22
DALE T. BERKBIGLER, M.D.
WAIVER AND RELEASE OF CLAIMS
This WAIVER AND RELEASE OF CLAIMS (this "Release") is made and entered
into by and between Foundation Health Systems, Inc. and it affiliates and
subsidiaries (hereinafter referred to as the "Company") and Dale T.
Berkbigler, M.D. (hereinafter referred to as the "Employee").
WHEREAS, the Company and Employee are entering into this Release as a
condition to Employee's receipt of severance pay and certain other
payments and benefits described below upon his termination of employment
with the Company.
NOW, THEREFORE, the Company and Employee agree as follows:
1. Employee's employment with the Company shall terminate as of the close of
business on June 30, 1999 (the "Termination Date"). Upon termination of
employment, Employee shall not represent to anyone that he is an employee
of the Company and shall not say or do anything purporting to bind the
Company.
2. The Company shall provide Employee (or, if applicable, his beneficiaries
or estate) the following payments and benefits:
a. Upon Employee's acceptance of the terms set forth herein as
evidenced by Employee's signature set forth below and upon the
expiration of any revocation period, Employee will receive $1,438,900
as a one-time lump sum payment (which represents the present value of
payments of base salary at the rate in effect immediately prior to the
Termination Date for a period of thirty-six (36) months after the
Termination Date (the "Severance Period"), as adjusted prior to the
Termination Date to include the 7% increase waived by Employee in 1997
and as adjusted during the Severance Period to include the 7% annual
increases provided for in Employee's Employment Agreement dated August
28, 1993, as amended on April 27, 1994 (the "Employment Agreement"),
and assuming a discount rate equal to 120% of the March 1999 short
term Applicable Federal Rate of 5.62%) and continuation of all
medical, health, disability, life and accident insurance maintained
for Employee's benefit immediately prior to the date of Employee's
termination (such insurance collectively, "Benefits") for a period of
three (3) years from the Termination Date, subject to all applicable
tax withholdings.
<PAGE>
Page 2
Dale T. Berkbigler, M.D.
Waiver and Release of Claims
b. Upon Employee's acceptance of the terms set forth herein as
evidenced by Employee's signature set forth below and upon the
expiration of any revocation period, Employee will also receive
Supplemental Benefit payments under the Company's Supplemental
Executive Retirement Plan ("SERP") based upon the form of Supplemental
Benefit selected by Employee under the SERP. The parties hereby agree
that the calculation of Employee's Supplemental Benefit payments under
the SERP shall be based upon a termination date of March 31, 1999 and
the Company agrees to credit Employee with additional service (solely
for purposes of the SERP) in order to provide Employee with fifteen
(15) years of service for purposes of such SERP. The parties hereby
further agree to and approve of the calculation of Employee's
Supplemental Benefit payments under the SERP, and the methodology used
to make such calculations, as set forth in the attached
correspondence, assuming a single life annuity as the form of
Supplemental Benefit under the SERP, in which event Employee would
receive $93,508 per year if Employee elects to receive such
Supplemental Benefit payments beginning at age 62 or $54,235 per year
if Employee elects to receive such Supplemental Benefit payments
beginning at age 55. In the event Employee selects a form of
Supplemental Benefit other than a single life annuity contemplated by
the attached calculations, such calculations shall be adjusted as
appropriate using the same methodology utilized in calculating the
Supplemental Benefit payments in the attached correspondence.
c. Employee agrees that $99,404.26 less required payroll taxes and
other applicable deductions is the total amount of earned and unused
vacation/paid-time-off ("PTO") owing to Employee as of the Termination
Date, and Employee acknowledges that upon receipt of such amount no
further PTO benefits will accrue after such date provided that in the
event any PTO has been used by Employee after January 31, 1999, then
such amount shall be appropriately adjusted downward. In addition, the
Company shall promptly reimburse Employee for all outstanding business
expenses appropriately incurred by Employee up to and including the
Termination Date in accordance with Company policy and Employee shall
be entitled to all of his 401(k) Plan account balance and all of his
account balance under the Company's prior Supplemental Executive
Retirement Plan pursuant to the applicable plan documents.
d. Employee's participation in all Company employee benefit plans as
an active employee shall cease on the Termination Date, and Employee
shall not be eligible to make contributions to or to receive
allocations under the Foundation Health Systems, Inc. 401(k) Associate
Savings Plan, to purchase shares of Company stock under the Foundation
Health Systems, Inc. Employee Stock Purchase Plan or to make any
deferrals pursuant to any deferred compensation plan of the Company
after the Termination Date.
e. All stock options held by Employee as of the Termination Date that
are
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Page 3
Dale T. Berkbigler, M.D.
Waiver and Release of Claims
currently exercisable (i.e., options to purchase 58,333 shares at
$32.50 per share, 92,000 shares at $35.25 per share and 25,000 shares
at $27.875 per share) shall remain exercisable by Employee (or in the
event of his death, his beneficiary) until May 31, 2001. All stock
options that are not yet exercisable as of the Termination Date shall
lapse and be canceled automatically without any further action as of
the Termination Date. It is agreed and acknowledged that the stock
option granted to the Employee by the Company on December 4, 1998
covering 200,000 shares of Class A Common Stock of the Company has
been canceled for failure of certain conditions subsequent to occur
and is therefore null and void.
f. Employee shall be entitled to purchase the laptop computer used by
Employee in the course of his employment at a purchase price equal to
the depreciated book value (as reflected on the Company's books and
records) of such computer.
4. In partial consideration of the Company providing Employee those payments
and benefits set forth in Section 3 above, and as a condition to receive
such payments and benefits, Employee freely and voluntarily enters into
this Release and by signing this Release, Employee, on his own behalf and
on behalf of his heirs, beneficiaries, successors, representatives,
trustees, administrators and assigns, hereby waives and releases the
Company, and each of its past, present and future officers, directors,
shareholders, employees, consultants, accountants, attorneys, agents,
managers, insurers, sureties, parent and sister corporations, divisions,
subsidiary corporations and entities, partners, joint venturers,
affiliates, beneficiaries, successors, representatives and assigns, from
any and all claims, demands, damages, debts, liabilities, controversies,
obligations, actions or causes of action of any nature whatsoever, whether
based on tort, statute, contract, indemnity, rescission or any other
theory or recovery, including but not limited to claims arising under
federal, state or local laws prohibiting discrimination in employment,
including Title VII of the Civil Rights Act of 1964, as amended, the Civil
Rights Act of 1870, as amended, claims of disability discrimination under
the Americans with Disabilities Act, the Age Discrimination in Employment
Act, as amended ("ADEA"), the Worker Adjustment and Retraining
Notification Act ("WARN"), the California Fair Employment and Housing Act,
the California Labor Code and the California Constitution (all as amended)
or claims growing out of any legal restrictions on the Company's right to
terminate its employees and whether for compensatory, punitive, equitable
or other relief, whether known, unknown, suspected or unsuspected, against
the Company, including without limitation claims which may have arisen or
may in the future arise in connection with any event which occurred on or
before the date of Employee's execution of this Release. The provisions
in this paragraph are not intended to prohibit Employee from filing a
claim for unemployment insurance. Furthermore, it is expressly agreed
that such payments shall fully and finally release the Company from all
obligations it may have under the Employment Agreement. It is also
expressly agreed that the obligations of the Company to Employee under the
Indemnification Agreement dated August 10, 1996 for acts or omissions of
Employee as a director, officer or employee of the Company or its
<PAGE>
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Dale T. Berkbigler, M.D.
Waiver and Release of Claims
affiliates prior to the Termination Date shall be unaffected by this
Release or the payments hereunder and shall continue in full force and
effect in accordance with the terms thereof.
5. Except for the rights and obligations of the parties set forth herein, the
Company, on its own behalf and on behalf of its affiliates, and its and
their officers and directors, agents, employees, successors and assigns,
hereby waives and releases Employee and each of his attorneys, agents,
employees, successors, heirs, beneficiaries and assigns, from any and all
claims, demands, damages, debts, liabilities, controversies, obligations,
actions or causes of action of any nature whatsoever, whether based on
tort, statute, contract, indemnity, rescission or any other theory or
recovery, and whether for compensatory, punitive, equitable or other
relief, whether known, unknown, suspected or unsuspected, against
Employee, including without limitation claims which may have arisen or may
in the future arise in connection with any event which occurred on or
before the date of the Company's execution of this Release.
Notwithstanding the generality of the foregoing, nothing contained herein
shall release Employee from any claim relating to the breach by Employee
of any confidentiality agreements with the Company or any affiliate of the
Company, or the obligations set forth herein.
6. Employee expressly waives any right or claim of right to assert hereafter
that any claim, demand, obligation and/or cause of action has, through
ignorance, oversight or error, been omitted from the terms of this
Release. Employee makes this waiver with full knowledge of his rights and
with specific intent to release both his known and unknown claims, and
therefore specifically waives the provisions of Section 1542 of the Civil
Code of California or other similar provisions of any other applicable
law, which reads as follows:
"A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor
at the time of executing the release, which if known by
him must have materially affected his settlement with the
debtor."
Employee understands and acknowledges the significance and consequence of
this Release and of such specific waiver of Section 1542, and expressly
agrees that this Agreement shall be given full force and effect according
to each and all of its express terms and provisions, including those
relating to unknown and unsuspected claims, demands, obligations and
causes of action herein above specified.
7. Employee shall not initiate or cause to be initiated against the Company
any compliance review, suit, action, investigation or proceeding of any
kind, or voluntarily participate in same, individually or as a
representative, witness or member of a class, under contract, law or
regulation, federal, state or local, pertaining to any matter related to
his employment with the Company, unless Employee first cooperates in
making his allegations known to the Company for the Company to take
corrective action at a time and place designated by the Company. Employee
represents that he has not, to date,
<PAGE>
Page 5
Dale T. Berkbigler, M.D.
Waiver and Release of Claims
initiated (or caused to be initiated) any such review, suit, action,
investigation or proceeding. In addition, Employee shall, without further
compensation, cooperate with the Company in defending or investigating
any claim in respect of which Employee is entitled to indemnification by
the Company or any other claim against the Company arising in whole or in
part during Employee's employment with the Company and its predecessors
or affiliates for which the Company requests Employee's assistance, which
cooperation shall include, but not be limited to, providing testimony and
assisting in information and document gathering efforts. In this
connection, it is agreed that the Company will use its reasonable best
efforts to assure that any request for such cooperation will not unduly
interfere with Employee's other material business, personal obligations
or commitments and the Company will pay all reasonable expenses incurred
by Employee in providing such cooperation.
8. Employee agrees he shall return to the Company immediately upon
termination of employment any building key(s), security passes or other
access or identification cards and any Company property in his
possession, including but not limited to any documents, credit cards,
computer equipment, mobile phones or data files unless otherwise
expressly set forth in this Release. Employee agrees to submit all
expense accounts and to pay promptly the outstanding balance on each
corporate credit card that the Company previously issued to Employee.
9. Except with respect to consulting services that may be provided to the
Company at the Company's request (in accordance with the procedure set
forth below), Employee shall not, without the Company's written consent
by an authorized representative, at any time prior or subsequent to the
execution of this Release, disclose, use, remove or copy any
confidential, trade secret or proprietary information he acquired during
the course of his employment by the Company, including without
limitation, any technical, actuarial, economic, financial, procurement,
provider, customer, underwriting, contractual, managerial, marketing or
other information of any type that has economic value in the business in
which the Company is engaged, but not including any previously published
information or other information generally in the public domain. It is
agreed that any and all consulting services provided by Employee to the
Company or any of its Subsidiaries or affiliates and all terms and
conditions thereof (including but not limited to all payment and scope of
work provisions) will be subject to the prior written approval of the
Senior Vice President, General Counsel and Secretary of the Company or
his designee. It is expressly agreed that the effectiveness of any
existing, proposed future or contemplated consulting arrangement or
agreement will be expressly subject to the foregoing prior approval
procedure.
10. In addition to any other part or term of this Release, Employee agrees
that he shall not, for a period of one (1) year from the date of this
Agreement, regardless of the reason for Employee's termination of
employment, on his own behalf or on behalf of any other person, either
directly or indirectly: 1) make known to any person, firm, corporation or
other entity of any type, the names and addresses of any of the Company's
customers,
<PAGE>
Page 6
Dale T. Berkbigler, M.D.
Waiver and Release of Claims
enrollees or providers or any other information pertaining to any of them
which is not available in previously published information or other
information generally in the public domain; or 2) disrupt, solicit or
influence or attempt to solicit, disrupt or influence any of the
Company's customers, employees, providers, vendors, agents or independent
contractors with whom Employee became acquainted during the course of
employment or service with the Company for the purpose of terminating
such a person's or entity's relationship with the Company.
Notwithstanding anything herein to the contrary, Employee may give oral
and written recommendations of former employees of the Company in
connection with such employees' employment efforts and such action will
not be deemed a breach of this Section 10.
11. Any developments or discoveries by Employee during the course of his
employment with the Company through the date of execution of this Release
or at any time while serving the Company under a consulting agreement,
resulting in patents, lists of customers, trade secrets, specialized
know-how or other intellectual property useful in the then current
business of the Company shall be for the sole benefit of the Company.
12. Nothing contained herein shall be construed as an admission of any
wrongful act, including but not limited to violation of any contract,
express or implied, or any federal, state or local employment laws or
regulations, and nothing contained herein shall be used for any purpose
except in proceedings related to the enforcement of this Release.
13. If any part or term of this Release is held invalid or unenforceable,
such invalidity or unenforceability shall not affect in any way the
validity or enforceability of any other part or term of this Release. It
is hereby further agreed that if any court of competent jurisdiction
shall determine that the restrictions imposed in this Release are
unreasonable (including, but not limited to, the definition of
Competitive Activity or the time period during which a provision of this
Release is applicable), the parties hereto hereby agree to any
restrictions that such court would find to be reasonable under the
circumstances.
14. Employee acknowledges that he has had an opportunity to consult and be
represented by counsel of Employee's choosing in the review of this
Release, and that he has been advised by the Company to do so, that the
Employee is fully aware of the contents of this Release and of its legal
effect, that the preceding paragraphs recite the sole consideration for
this Release, and that Employee enters into this Release freely, without
coercion, and based on the Employee's own judgment and not in reliance
upon any representation or promise made by the other party, other than
those contained herein. There may be no modification of the terms of this
Release except in writing signed by the parties hereto.
15. Employee agrees and acknowledges that this Release recites all payments
and benefits Employee is entitled to receive hereunder and under the
Employment Agreement, and that no other payments or benefits will be
asserted or requested by Employee.
16. This Release shall be construed and governed by the laws of the State of
California.
<PAGE>
Page 7
Dale T. Berkbigler, M.D.
Waiver and Release of Claims
EMPLOYEE ACKNOWLEDGES BY SIGNING BELOW that (i) Employee has not relied
upon any representations, written or oral, not set forth in this Release;
(ii) at the time Employee was given this Release Employee was informed in
writing by the Company that (a) Employee had at least 21 days in which to
consider whether Employee would sign the Release and (b) Employee should
consult with an attorney before signing the Release; and (iii) Employee had
an opportunity to consult with an attorney and either had such consultations
or has freely decided to sign this Release without consulting an attorney.
Employee further acknowledges that he may revoke acceptance of this
Release by delivering a letter of revocation within seven (7) days after the
date set forth below addressed to: FHS Corporate Legal Department, 21650
Oxnard Street, Woodland Hills, CA, 91367.
Finally, Employee acknowledges that he understands that this Release
shall not become effective until the eighth (8th) day following his signing
this Release and that if Employee does not revoke his acceptance of the terms
of this Release within the seven (7) day period following the date on which
Employee signs this Release, then this Release shall be binding and
enforceable.
IN WITNESS WHEREOF, the parties hereto have executed this Release as of the
dates set forth below.
Employee Foundation Health Systems, Inc.
By: /s/ Dale T. Berkbigler By: /s/ B. Curtis Westen
-------------------------------- -------------------------------
Name: Dale T. Berkbigler, M.D. Name: B. Curtis Westen, Esq.
Title: Senior Vice President,
General Counsel and
Secretary
Dated: 6/30/99 Dated: 6/30/99
------------------------------- ------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 475,755
<SECURITIES> 576,849
<RECEIVABLES> 511,270<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,036,367
<PP&E> 320,769<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,456,618
<CURRENT-LIABILITIES> 1,505,646
<BONDS> 1,089,190<F3>
0
0
<COMMON> 125
<OTHER-SE> 811,555<F4>
<TOTAL-LIABILITY-AND-EQUITY> 3,456,618
<SALES> 0
<TOTAL-REVENUES> 4,337,563
<CGS> 0
<TOTAL-COSTS> 3,455,688
<OTHER-EXPENSES> 713,952
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,595
<INCOME-PRETAX> 125,328
<INCOME-TAX> 50,021
<INCOME-CONTINUING> 75,307
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 5,417
<NET-INCOME> 69,890
<EPS-BASIC> 0.57
<EPS-DILUTED> 0.57
<FN>
<F1>NET OF ALLOWANCES FOR DOUBTFUL ACCOUNTS
<F2>NET OF ACCUMULATED DEPRECIATION
<F3>INCLUDES BORROWING UNDER REVOLVING CREDIT FACILITY, MISCELLANEOUS
NOTES PAYABLE AND CAPITAL LEASES
<F4>NET OF TREASURY STOCK
</FN>
</TABLE>
