<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Under Rule 14a-12
FOUNDATION HEALTH SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
[LOGO]
FOUNDATION
HEALTH
SYSTEMS,
INC.
NOTICE OF
2000 ANNUAL
MEETING
AND
PROXY
STATEMENT
March 30, 2000
Dear Stockholders:
It is a pleasure to invite you to attend the 2000 Annual Meeting of
Stockholders of Foundation Health Systems, Inc. to be held simultaneously via
the Internet at www.vcall.com and at the Hilton Woodland Hills & Towers, 6360
Canoga Avenue, Woodland Hills, California 91367 on Thursday, May 4, 2000, at
10:00 a.m. (PDT).
Each item of business described in the accompanying Notice of Annual Meeting
and Proxy Statement will be discussed during the meeting and stockholders who
attend in person will have an opportunity to ask questions. A report on our
business operations will be presented at the meeting.
IT IS IMPORTANT THAT YOU VOTE YOUR SHARES WHETHER OR NOT YOU PLAN TO ATTEND
THE MEETING. We urge you to carefully review the Proxy Statement and to vote
your choices either via the Internet or on the enclosed card. Please sign, date
and return your proxy card in the envelope provided as soon as possible or
complete a proxy card over the Internet at www.harrisbank.com/ wproxy. If you do
attend the meeting in person, your proxy can be revoked at your request.
Sincerely,
/s/ Jay M. Gellert
Jay M. Gellert
PRESIDENT AND CHIEF EXECUTIVE OFFICER
- -
<PAGE>
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Foundation Health Systems, Inc. (the "Company") will hold its 2000 Annual
Meeting of Stockholders (the "Annual Meeting") on Thursday, May 4, 2000 at 10:00
a.m. (PDT) simultaneously via the Internet at www.vcall.com and at the Hilton
Woodland Hills & Towers, 6360 Canoga Avenue, Woodland Hills, California 91367,
for the following purposes:
1. To elect two directors to serve until the 2003 Annual Meeting of
Stockholders.
2. To ratify the selection of Deloitte & Touche LLP as the Company's
independent public accountants.
3. To approve the material terms of a new Executive Officer Incentive Plan
for the Company's executive officers.
4. To act upon a stockholder proposal that may be introduced at the Annual
Meeting as set forth in the accompanying Proxy Statement.
5. To act upon any other matters that may properly come before the meeting.
The Board of Directors has fixed Friday, March 17, 2000 as the Record Date
for the determination of the stockholders entitled to notice of, and to vote at,
the Annual Meeting or any adjournment or postponement of the Annual Meeting.
At the Annual Meeting, each share of Class A Common Stock, par value $.001
per share, of the Company represented at the Annual Meeting will be entitled to
one vote on each matter properly brought before the Annual Meeting. The
California Wellness Foundation holds all of the outstanding Class B Common
Stock, par value $.001 per share, of the Company (which is non-voting) and has
been invited to send representatives to attend the Annual Meeting. Jay M.
Gellert and B. Curtis Westen have been appointed as proxy holders, with full
rights of substitution, for the holders of Class A Common Stock.
By Order of the Board of Directors,
/s/ B. Curtis Westen
B. Curtis Westen, Esq.
SENIOR VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY
March 30, 2000
YOUR VOTE IS IMPORTANT
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING EITHER
IN PERSON OR VIA THE INTERNET. HOWEVER, TO ENSURE YOUR REPRESENTATION AT THE
ANNUAL MEETING, PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS
SOON AS POSSIBLE IN THE ENCLOSED SELF-ADDRESSED, POSTAGE-PAID ENVELOPE OR,
ALTERNATIVELY, FILL OUT THE PROXY CARD OVER THE INTERNET AT
WWW.HARRISBANK.COM/WPROXY. IF YOU ATTEND THE ANNUAL MEETING IN PERSON, YOU MAY
VOTE AT THE MEETING EVEN IF YOU HAVE PREVIOUSLY RETURNED A PROXY.
<PAGE>
[LOGO]
PROXY STATEMENT
GENERAL; VOTING OF SHARES
The accompanying proxy is solicited by the Board of Directors of Foundation
Health Systems, Inc. (the "Company") for use at the 2000 Annual Meeting of
Stockholders of the Company (the "Annual Meeting") to be held on Thursday,
May 4, 2000 at 10:00 a.m. (PDT) simultaneously via the Internet at www.vcall.com
and at the Hilton Woodland Hills & Towers, 6360 Canoga Avenue, Woodland Hills,
California 91367, and at any adjournments or postponements thereof. This Proxy
Statement and accompanying proxy card will be mailed beginning on or about
March 30, 2000 to give holders of Class A Common Stock, par value $.001 per
share ("Class A Common Stock"), of the Company of record on March 17, 2000 (the
"Record Date") an opportunity to vote at the Annual Meeting.
The Annual Meeting will be held simultaneously via the Internet and in
person. Participation at the Annual Meeting via the Internet will consist of
live sound and real-time access to printed material. To attend the Annual
Meeting via the Internet, a stockholder should log-on to www.vcall.com on
Thursday, May 4, 2000 and follow the instructions provided at the site.
Stockholders will NOT be permitted to vote over the Internet during the Annual
Meeting.
Each share of Class A Common Stock represented at the Annual Meeting is
entitled to one vote on each matter properly brought before the Annual Meeting.
The Company also has outstanding shares of non-voting Class B Common Stock, par
value $.001 per share ("Class B Common Stock"), all of which is held by The
California Wellness Foundation (the "CWF"). The Company's Fifth Amended and
Restated By-Laws, as amended (the "By-Laws"), require that the holders of a
majority of the total number of shares entitled to vote be present in person or
by proxy in order for the business of the Annual Meeting to be transacted.
Attendance at the Annual Meeting over the Internet will not be counted for
purposes of determining the presence or absence of a quorum to transact business
at the Annual Meeting.
In voting, please specify your choices by marking the appropriate spaces on
the enclosed proxy card, signing and dating the card and returning it in the
accompanying envelope or, alternatively, by completing a proxy card over the
Internet at www.harrisbank.com/wproxy before 5:00 p.m. (CDT) on May 2, 2000.
VOTING OVER THE INTERNET WILL NOT BE PERMITTED AFTER 5:00 P.M. (CDT) ON TUESDAY,
MAY 2, 2000. If no directions are given and either the signed card is returned
or the Internet proxy card is submitted, then the proxy holders will vote the
shares for the election of all listed nominees, in accordance with the
directors' recommendations or as stated on the proxy card for the other subjects
listed on the proxy card, and at their discretion on any other matters that may
properly come before the meeting. In situations where brokers are prohibited
from exercising discretionary authority for beneficial owners who have not
returned proxies to the brokers (so-called "broker non-votes"), the affected
shares will be counted for purposes of determining the presence or absence of a
quorum for the transaction of business at the Annual Meeting but will not be
included in the vote totals and, therefore, will have no effect on the outcome
of the votes.
Instructions on how to submit a proxy via the Internet are located on the
attachment to the proxy card included with this Proxy Statement. The Internet
voting procedures are designed to authenticate stockholders of the Company by
use of a Control Number located on the attachment to the proxy card included
herewith. If you hold your shares through a bank, broker or other holder of
record, check the information provided by that entity to determine which voting
options are available to you. Please be aware that any
3
<PAGE>
costs related to voting over the Internet, such as Internet access charges and
telecommunications costs, will be your responsibility.
REVOCABILITY OF PROXIES
Any stockholder giving a proxy has the power to revoke it at any time before
the proxy is voted. Proxies may be revoked by filing with the Secretary of the
Company written notice of revocation bearing a later date than the proxy, by
duly executing a subsequently dated proxy relating to the same shares of
Class A Common Stock and delivering it to the Secretary of the Company or
submitting it electronically via the Internet at www.harrisbank.com/wproxy
before 5:00 p.m. (CDT) on May 2, 2000, or by attending the Annual Meeting in
person and voting such shares during the Annual Meeting. Attendance at the
Annual Meeting will not in and of itself constitute revocation of a proxy. Any
subsequently dated proxy or written notice revoking a proxy should be sent to
the Secretary of Foundation Health Systems, Inc., at its executive offices at
21650 Oxnard Street, Woodland Hills, California 91367 or if a subsequently dated
proxy is submitted electronically, it should be sent via the Internet before
5:00 p.m. (CDT) on May 2, 2000 using the web site at www.harrisbank.com/wproxy.
SHARES OUTSTANDING
Only holders of record of Class A Common Stock at the close of business on
the Record Date are entitled to vote at the Annual Meeting. As of the Record
Date, the Company had outstanding 121,835,631 shares of Class A Common Stock.
Each share of Class A Common Stock is entitled to one vote. As of the Record
Date, the Company also had outstanding 563,742 shares of Class B Common Stock,
all of which are held by the CWF and all of which are nonvoting. The CWF has
been invited to send representatives to the Annual Meeting.
SOLICITATION
The Company will bear the entire cost of the solicitation of proxies,
including preparation, assembly and mailing of this Proxy Statement, the proxy
and any additional materials furnished to stockholders. Proxies may be solicited
by directors, officers and a small number of regular employees of the Company
personally or by mail, telephone or telegraph, but such persons will not be
specially compensated for such service. Copies of solicitation material will be
furnished to brokerage houses, fiduciaries and custodians that hold shares of
Class A Common Stock of record for beneficial owners for forwarding to such
beneficial owners. The Company has also engaged Innisfree M&A Incorporated to
assist in the solicitation of proxies. This firm will be paid a fee of
approximately $10,000 and will be reimbursed for expenses incurred in connection
with such engagement. The Company may also reimburse persons representing
beneficial owners for their costs of forwarding the solicitation material to
such owners.
YOUR VOTE IS IMPORTANT. PLEASE RETURN A PROXY CARD (OR FILL OUT THE INTERNET
PROXY) PROMPTLY SO YOUR SHARES CAN BE REPRESENTED, EVEN IF YOU PLAN TO ATTEND
THE ANNUAL MEETING IN PERSON. HIGHLIGHTS OF THE ANNUAL MEETING AND THE VOTING
RESULTS WILL BE INCLUDED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTER ENDED JUNE 30, 2000.
4
<PAGE>
INTRODUCTION
Foundation Health Systems, Inc. (the "Company" or "FHS") is an integrated
managed care organization which administers the delivery of managed health care
services. The Company's health maintenance organizations ("HMOs"), insured
preferred provider organizations ("PPOs") and government contracts subsidiaries
provide health benefits to approximately 5.5 million individuals in 18 states
through group, individual, Medicare risk, Medicaid and TRICARE (formerly
Civilian Health and Medical Program of the Uniformed Services ("CHAMPUS"))
programs. The Company's subsidiaries also offer managed health care products
related to behavioral health, dental, vision and prescription drugs, and offer
managed health care product coordination for multi-region employers and
administrative services for medical groups and self-funded benefits programs.
The Company operates and conducts its HMO and other businesses through its
subsidiaries.
The Company's current operations are a result of the merger transaction (the
"FHS Combination") involving the Company (then named Health Systems
International, Inc. ("HSI")) and Foundation Health Corporation ("FHC") which was
consummated on April 1, 1997.
PROPOSAL 1--ELECTION OF DIRECTORS
NOMINATION AND ELECTION OF DIRECTORS
The Board of Directors of the Company currently consists of 10 persons,
divided into three classes with four directors designated in Class III, three
directors designated in Class I and three directors designated in Class II. At
the Annual Meeting, stockholders will elect two directors for Class I. One
vacancy currently exists in Class I, and a second vacancy will exist in Class I
after the Annual Meeting due to Adm. Fowler's pending retirement. Adm. Fowler
recently indicated his intention to retire after the current Annual Meeting, and
therefore requested that he not be re-nominated to serve as a Class I director.
The Class I nominees are Gov. George Deukmejian and Jay M. Gellert. Each
Class I director will be elected for a three-year term and will hold office
until the 2003 Annual Meeting of Stockholders. In each case, the elected
director will continue in office until such director's successor is elected and
has been qualified, or until such director's earlier death, resignation or
removal.
The By-Laws provide that the persons receiving a plurality of the votes
cast, up to the number of directors to be elected, shall be elected.
Stockholders eligible to vote at the Annual Meeting do not have cumulative
voting rights with respect to the election of directors. Since only two nominees
have been named, proxies cannot be voted for a number of persons greater than
two. Shares represented by proxies marked "withhold authority" for one or more
nominees will be counted as a negative vote.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR EACH NAMED NOMINEE.
NOMINEES AND CONTINUING DIRECTORS
The Company's Fourth Amended and Restated Certificate of Incorporation (the
"Certificate") provides that the Board of Directors will consist of not less
than three nor more than twenty members, the exact number to be determined in
accordance with the By-Laws. The By-Laws contain certain transitionary
provisions applicable to the Board of Directors until April 1, 2002 (the
"Transition Period"). During the Transition Period the Company's Board of
Directors is to consist of certain persons appointed at the time of the FHS
Combination by FHC or subsequently by such FHC appointees (collectively, the
"FHC Designees"), and certain persons appointed at the time of the FHS
Combination by HSI or subsequently by such HSI appointees (collectively, the
"HSI Designees"). Such provisions also address the size of the
5
<PAGE>
Board of Directors and certain other matters, and may be overridden by the
affirmative vote of at least eight members of the Board of Directors.
The Certificate provides for the Board of Directors to be divided into three
classes, each class to serve for staggered three-year terms, with each class
consisting, as nearly as possible, of one-third of the directors. The Board of
Directors believes that a classified Board of Directors with staggered terms
will help to assure the continuity and stability of the Board of Directors and
the business strategies and policies of the Company.
In February 1999, the Board of Directors elected Jay M. Gellert, the
Company's President and Chief Executive Officer, to fill a vacancy in Class I of
the Board of Directors. Effective March 1, 1999, Malik M. Hasan, M.D., a prior
director in Class I, resigned from the Company's Board of Directors in
connection with his retirement; as a result, there currently exists one vacancy
in Class I. As referenced above, due to Adm. Fowler's pending retirement, a
second vacancy will exist in Class I after the Annual Meeting. These vacancies
will be filled in the future pursuant to and in accordance with the Company's
By-Laws.
The nominees were designated for election, pursuant to the By-Laws, by the
Committee on Directors of the Board of Directors of the Company. Each of the
nominees has consented to serve as a director if elected. The following table
sets forth certain information with respect to the nominees as well as to those
other directors in Class II and Class III whose terms continue after the Annual
Meeting:
NOMINEES
<TABLE>
<CAPTION>
TERM TO
NAME PRINCIPAL OCCUPATION OR EMPLOYMENT AGE EXPIRE
- ---- --------------------------------------------------- -------- --------
<S> <C> <C> <C>
CLASS I
Gov. George Deukmejian.... Senior Counsel of Sidley & Austin and former
Governor of the State of California 71 2003
Jay M. Gellert............ President and Chief Executive Officer of the
Company 46 2003
</TABLE>
CONTINUING DIRECTORS
<TABLE>
<CAPTION>
TERM TO
NAME PRINCIPAL OCCUPATION OR EMPLOYMENT AGE EXPIRE
- ---- --------------------------------------------------- -------- --------
<S> <C> <C> <C>
CLASS II
Richard W. Hanselman...... Chairman of the Board of the Company and Director
and Consultant to various companies 72 2001
Raymond S. Troubh......... Financial Consultant to and Director of various
companies 73 2001
Roger F. Greaves.......... Former Co-Chairman of the Board of Directors, Co-
President and Co-Chief Executive Officer of the
Company and Director of various companies 62 2001
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
TERM TO
NAME PRINCIPAL OCCUPATION OR EMPLOYMENT AGE EXPIRE
- ---- --------------------------------------------------- -------- --------
<S> <C> <C> <C>
CLASS III
J. Thomas Bouchard........ Senior Vice President, Human Resources of
International Business Machines Corporation 59 2002
Thomas T. Farley.......... Senior Partner of Petersen, Fonda, Farley, Mattoon,
Crockenberg and Garcia, P.C. 65 2002
Patrick Foley............. Former Chairman, President and Chief Executive
Officer of DHL Airways, Inc., and Director of
various companies 68 2002
Richard J. Stegemeier..... Chairman Emeritus of the Board of Directors of
Unocal Corporation 71 2002
</TABLE>
OTHER CURRENT DIRECTORS
<TABLE>
<CAPTION>
TERM TO
NAME PRINCIPAL OCCUPATION OR EMPLOYMENT AGE EXPIRE
- ---- --------------------------------------------------- -------- --------
<S> <C> <C> <C>
CLASS I
Adm. Earl B. Fowler....... Former Vice Admiral, U.S. Navy, and Commander of
the Naval Sea Systems Command 74 2000
</TABLE>
INFORMATION CONCERNING CURRENT MEMBERS OF THE BOARD OF DIRECTORS AND NOMINEES
MR. BOUCHARD became a director of the Company upon consummation of the FHS
Combination. Previously, he served as a director of HSI since January 1994, upon
consummation of the merger transaction involving Health Net and QualMed, Inc.
("QualMed") which created HSI (the "HSI Combination"). Mr. Bouchard served as a
director of QualMed from May 1991 until February 1995. Since October 1994,
Mr. Bouchard has served as Senior Vice President, Human Resources of
International Business Machines Corporation. From June 1989 until October 1994,
Mr. Bouchard served as Senior Vice President & Chief Human Resources Officer of
U.S. West, Inc., a diversified global communications company, and prior to that
time he was Senior Vice President-Human Resources and Organization for United
Technologies Corp. Mr. Bouchard has served on the Board of Directors of the
Labor Policy Association since March 1991 and Nordstrom fsb (formerly Nordstrom
National Credit Bank) since April 1991. Mr. Bouchard also serves on the Board of
Trustees of the American Indian College Fund and the Board of the Tomas Rivera
Policy Institute, a think tank on Latino issues.
MR. DEUKMEJIAN became a director of the Company upon consummation of the FHS
Combination. Previously, he served as a director of HSI since January 1994, upon
consummation of the HSI Combination. Mr. Deukmejian served as a director of
QualMed from April 1992 until February 1995. From February 1991 through
June 1999, Mr. Deukmejian was a partner in the law firm of Sidley & Austin, Los
Angeles, California. Since July 1999, Mr. Deukmejian has been senior counsel to
Sidley & Austin. Mr. Deukmejian served as Governor of the State of California
for two terms, from January 1983 to January 1991. Mr. Deukmejian also served the
State of California as Attorney General from 1979 to 1982, as a State Senator
from 1967 to 1978 and as a State Assemblyman from 1963 to 1966. Mr. Deukmejian
has been a director of Burlington Northern Santa Fe Corporation, a railroad
company, since September 1995, and was a director of one of its predecessors,
Santa Fe Corporation, from January 1991 until September 1995. Mr. Deukmejian is
also a director of The Keith Companies.
7
<PAGE>
MR. FARLEY became a director of the Company upon consummation of the FHS
Combination. Previously, he served as a director of HSI since January 1994, upon
consummation of the HSI Combination. Mr. Farley served as a director of QualMed
from February 1991 until February 1995 and is a senior partner in the law firm
of Petersen, Fonda, Farley, Mattoon, Crockenberg and Garcia, P.C., Pueblo,
Colorado. Mr. Farley was formerly President of the governing board of Colorado
State University, the University of Southern Colorado and Ft. Lewis College and
Chairman of the Colorado Wildlife Commission. He served as Minority Leader of
the Colorado House of Representatives from 1967 to 1975. Mr. Farley was a
director of the Public Service Company of Colorado, a public gas and electric
company, from 1983 to 1997 and has been a director/advisor of Norwest Banks of
Pueblo and Sunset since 1985. Mr. Farley is an emeritus member of the Board of
Regents of Santa Clara University, a Jesuit institution, and a director of
Colorado Public Radio.
MR. FOLEY became a director of the Company in April 1997 upon consummation
of the FHS Combination. Mr. Foley served as a director of FHC from 1996 until
the FHS Combination. Mr. Foley served as President and Chief Executive Officer
of DHL Airways, Inc. from September 1988 to July 1999, and as Chairman of the
Board of such company from September 1988 through December 1999. Mr. Foley is
also a director of Continental Airlines, Glenborough Realty Trust, Del Monte
Foods and Flextronics International.
MR. FOWLER became a director of the Company in April 1997 upon consummation
of the FHS Combination. Mr. Fowler served as a director of FHC from 1988 until
the FHS Combination. Prior thereto, Mr. Fowler served in the United States Navy
and retired as Vice Admiral, U.S. Navy, and Commander of the Naval Sea Systems
Command. Mr. Fowler recently indicated his intention to retire as a director of
the Company after the current Annual Meeting.
MR. GELLERT was elected to the Board of Directors of the Company in
February 1999. He became President and Chief Executive Officer of the Company in
August 1998. Previously Mr. Gellert served as President and Chief Operating
Officer of the Company from May 1997 until August 1998. From April 1997 to
May 1997, Mr. Gellert served as Executive Vice President and Chief Operating
Officer of the Company. Mr. Gellert served as President and Chief Operating
Officer of HSI from June 1996 until March 1997. He served on the Board of
Directors of HSI from June 1996 to April 1997. Prior to joining HSI,
Mr. Gellert directed Shattuck Hammond Partners Inc.'s strategic advisory
engagements in the area of integrated delivery systems development, managed care
network formation and physician group practice integration. Prior to joining
Shattuck Hammond Partners Inc., Mr. Gellert was an independent consultant, and
from 1988 to 1991, he served as President and Chief Executive Officer of Bay
Pacific Health Corporation. From 1985 to 1988, he was Senior Vice President and
Chief Operating Officer for California Healthcare System.
MR. GREAVES became a director of the Company in April 1997 upon consummation
of the FHS Combination. Mr. Greaves served as a director of HSI from
January 1994 until the FHS Combination. Mr. Greaves served as Co-Chairman of the
Board of Directors, Co-President and Co-Chief Executive Officer of the Company
from January 1994 (upon consummation of the HSI Combination) until March 1995.
Prior to January 1994, Mr. Greaves served as Chairman of the Board of Directors,
President and Chief Executive Officer of H.N. Management Holdings, Inc. (a
predecessor to the Company) since its incorporation in June 1990. Mr. Greaves
currently serves as Chairman of the Board of Directors of Health Net, a
subsidiary of the Company. Mr. Greaves also served a prior term as Chairman of
the Board of Directors of Health Net, and concurrently served as President and
Chief Executive Officer of Health Net. Prior to joining Health Net, Mr. Greaves
held various management roles at Blue Cross of Southern California, including
Vice President of Human Resources and Assistant to the President, and held
various management positions at Allstate Insurance Company from 1962 until 1968.
Mr. Greaves is a founding member of (and continues to serve on) the Board of
Governors of California State University at Long Beach, and he is a member of
the board of directors of Zymed Corporation.
8
<PAGE>
MR. HANSELMAN became a director of the Company in April 1997 upon
consummation of the FHS Combination and became Chairman of the Board of
Directors in May 1999. Mr. Hanselman served as a director of FHC from 1990 until
the FHS Combination. He has been a corporate director of and consultant to
various companies since 1986. Mr. Hanselman is a director of Arvin Industries
and the Bradford Funds, and chairman of a small privately-held company.
MR. STEGEMEIER became a director of the Company in April 1997 upon
consummation of the FHS Combination. Mr. Stegemeier served as a director of FHC
from 1993 until the FHS Combination. He is Chairman Emeritus of the Board of
Directors of Unocal Corporation and served as Chairman and Chief Executive
Officer of Unocal Corporation from July 1988 until his retirement in May 1994.
Mr. Stegemeier is also a director of Halliburton Company, Northrop Grumman
Corporation, Sempra Energy and Montgomery Watson, Inc.
MR. TROUBH became a director of the Company in April 1997 upon consummation
of the FHS Combination. Mr. Troubh served as a director of FHC from 1991 until
the FHS Combination. He is a financial consultant in New York City and a former
Governor of the American Stock Exchange. Mr. Troubh served as a general partner
of Lazard Freres & Co., an investment banking firm. Mr. Troubh is also a
director of ARIAD Pharmaceuticals, Inc., Diamond Offshore Drilling, Inc.,
General American Investors Company, Starwood Hotels and Resorts, Inc., Triarc
Companies, Inc. and WHX Corporation. Mr. Troubh was a director of Olsten
Corporation ("Olsten") until March 2000, at which time he became a director of
Gentiva Health Services ("Gentiva") in connection with the sale by Olsten of
certain business lines to Adecco SA and the accompanying transfer of Olsten's
health services business to Gentiva. He is also a Trustee of MicroCap
Liquidating Trust and Petrie Stores Liquidating Trust.
9
<PAGE>
EXECUTIVE OFFICERS
The following sets forth certain biographical information with respect to
the current executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------------------------
<S> <C> <C>
Jay M. Gellert.............. 46 President and Chief Executive Officer
Jeffrey J. Bairstow......... 41 President of Government and Specialty Services Division
Maurice Costa............... 52 President of Employer and Occupational Services Division
Karen A. Coughlin........... 52 President of Eastern Division
Steven P. Erwin............. 56 Executive Vice President and Chief Financial Officer
Karin D. Mayhew............. 49 Senior Vice President of Human Resources
Cora Tellez................. 50 President of Western Division
Gary S. Velasquez........... 39 President of New Ventures Group and Former President of
Specialty Services and Government Operations Division
B. Curtis Westen, Esq....... 39 Senior Vice President, General Counsel and Secretary
</TABLE>
MR. GELLERT became President and Chief Executive Officer of the Company in
August 1998. Previously, Mr. Gellert served as President and Chief Operating
Officer of the Company from May 1997 until August 1998. From April 1997 to
May 1997, Mr. Gellert served as Executive Vice President and Chief Operating
Officer of the Company. Mr. Gellert served as President and Chief Operating
Officer of HSI from June 1996 until March 1997. He served on the Board of
Directors of HSI from June 1996 to April 1997. Mr. Gellert has been a director
of the Company since March 1999. Prior to joining HSI, Mr. Gellert directed
Shattuck Hammond Partners Inc.'s strategic advisory engagements in the area of
integrated delivery systems development, managed care network formation and
physician group practice integration. Prior to joining Shattuck Hammond Partners
Inc., Mr. Gellert was an independent consultant, and from 1988 to 1991, he
served as President and Chief Executive Officer of Bay Pacific Health
Corporation. From 1985 to 1988, Mr. Gellert was Senior Vice President and Chief
Operating Officer for California Healthcare System.
MR. BAIRSTOW became President of the Company's Government and Specialty
Services Division (formerly Specialty Services and Government Operations
Division) in November 1999. Mr. Bairstow served as President of FHS Specialty
Services from February 1999 until that date. Previously, Mr. Bairstow served as
Executive Vice President and Chief Financial Officer of HealthNet from
February 1998 until February 1999. Before joining the Company, Mr. Bairstow held
the dual position of Chief Operating Officer of America Service Group, Inc.
("ASG"), a provider of managed care services, and President and Chief Executive
Officer of the operating subsidiary of ASG from November 1996 to February 1998.
Prior to that date, Mr. Bairstow held the position of President of Managed
Health Network, the behavioral health subsidiary of Foundation Health Systems,
from October 1995 to November 1996. From August 1991 to October 1995,
Mr. Bairstow served as Vice President of Finance/Chief Operating Officer of
Vendell Healthcare. Prior thereto, Mr. Bairstow served as Senior Vice President
for Operations and Vice President for Finance of Park Healthcare Company from
August 1986 to August 1991.
MR. COSTA has served as President of the Company's Employer and Occupational
Services Division since December 1998. From April 1997 until December 1998, he
served as President of FHS' Workers' Compensation Division. Previously,
Mr. Costa was a founder of Business Insurance Corporation ("BIC"), and he played
a significant role in its acquisition of California Compensation Insurance
Company in 1988 and its ultimate sale to FHC in August 1993.
MS. COUGHLIN has served as President of the Company's Eastern Division since
January 1, 2000 (upon the Company's reorganization of its operating divisions),
and served as President and Chief Executive Officer of the Northeast Division of
the Company from October 1998 through December 31, 1999. From 1992 until 1998,
she served as President of one of the two operating divisions of Humana, Inc.
10
<PAGE>
("Humana"), a leading national health care company. Prior thereto, Ms. Coughlin
served as Vice President and General Manager of Humana in Chicago, Illinois, and
before that she served as a Vice President of Humana Health Plans of Kentucky.
Currently she serves on the boards of several organizations, including The
Governor of Connecticut's Council on Economic Competitiveness and Technology,
NeuroSource, Inc., Community Physicians Network, Inc. and Today's Chicago Woman
Foundation.
MR. ERWIN became Executive Vice President and Chief Financial Officer of the
Company in March 1998. From 1994 until 1997, he served as Executive Vice
President and Chief Financial Officer for U.S. Bancorp, a major superregional
bank holding company based in Portland, Oregon. U.S. Bancorp was acquired by
First Bank System in 1997. From 1987 to 1994, Mr. Erwin served as Treasurer of
Boston-based BayBanks, Inc. BayBanks was a major retail bank in Boston.
Mr. Erwin is also a member of the Board of Directors and Chairman of the Audit
Committee of Summit Design, Inc., a Beaverton, Oregon-based technology company.
Summit is a leading supplier of software tools designed to solve the integrated
circuit engineering problems caused by increasing chip complexity.
MS. MAYHEW became Senior Vice President of Human Resources of the Company in
April 1999. Prior to joining the Company, she served as Senior Vice President
Organization Development of Southern New England Telecommunications Company
("SNET"), a northeast regional information, entertainment and telecommunications
company based in Connecticut. SNET was acquired by SBC Communications, Inc. in
October 1998. Prior thereto, Ms. Mayhew served in various capacities at SNET,
including Vice President Human Resources, since 1972.
MS. TELLEZ has served as President of the Company's Western Division since
January 1, 2000 (upon the Company's reorganization of its operating divisions),
and served as President of the Company's California Division from November 16,
1998 through December 31, 1999. Formerly, she served as President and Chair of
Prudential Healthcare Plan of California, Inc., responsible for operations in
California, Colorado and Arizona. Prior to joining Prudential in 1997,
Ms. Tellez served as Senior Vice President and regional Chief Executive Officer
of Blue Shield of California. Ms. Tellez began her career in health care in 1978
with Kaiser Foundation Health Plan, where she held several executive positions
during her sixteen year tenure culminating with serving as Vice President and
Regional Manager of the Hawaii Plan. Currently, Ms. Tellez serves as a member of
the Board of Directors of several organizations, including Golden State
Bancorp Inc., Institute for Medical Quality, California Association of Health
Plans, Holy Names College, Asian Community Mental Health Services and The
Institute for the Future, in Menlo Park, California.
MR. VELASQUEZ became President of the Company's New Venture Group effective
November 1999. He served as President of the Company's Government Operations
Division from consummation of the FHS Combination through November 1999 and as
President of the Company's Specialty Services Division from September 1997
through November 1999. Prior to the FHS Combination, Mr. Velasquez served as
President and Chief Operating Officer of FHC's California HMO. Prior to this
position, Mr. Velasquez served as President and Chief Operating Officer of FHC's
managed behavioral health care organization and as President and Chief Operating
Officer of Specialty Services for FHC. Prior to joining FHC, Mr. Velasquez
served as Chief Financial Officer/General Manager of Managed Health Network (now
a FHS subsidiary). He also served as Vice President, Controller of Equicor.
MR. WESTEN became Senior Vice President, General Counsel and Secretary of
the Company upon consummation of the FHS Combination. Mr. Westen served as
Senior Vice President, General Counsel and Secretary of HSI since April 1995.
Mr. Westen also serves as a director of certain subsidiaries of the Company.
Mr. Westen has served as Senior Vice President, General Counsel and Secretary of
QualMed since February 1994, and served as Vice President of Administration of
QualMed from August 1993 until February 1994. Since February 1995, he has served
as a director of QualMed. Mr. Westen served as Assistant General Counsel and
Assistant Secretary of QualMed since joining QualMed in March 1992 until
August 1993. From September 1986 until March 1992, Mr. Westen was an attorney
with the firm of Lord, Bissell & Brook in Chicago, Illinois.
11
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following information relates to transactions during 1999 by the Company
with certain directors and executive officers of the Company.
Mr. Bouchard, a director of the Company, is Senior Vice President, Human
Resources of International Business Machines Corporation ("IBM"). During 1999,
the Company and its subsidiaries engaged IBM as a consultant with respect to
various technology, information systems, hardware and other matters, including
management of its Year 2000 program. During 1999, the Company paid to IBM
approximately $9.0 million in consulting fees.
Gov. Deukmejian, a director of the Company, is senior counsel to the law
firm of Sidley & Austin. The Company and certain of its subsidiaries paid
Sidley & Austin approximately $1.2 million in fees for legal services rendered
to the Company and certain of its subsidiaries in 1999. Sidley & Austin was an
employer group of a Company subsidiary in 1999. Premiums paid by such firm to
this Company subsidiary totaled approximately $125,000 in 1999.
Mr. Farley, a director of the Company, was paid an aggregate of $95,000 in
consulting fees in 1999 and 2000 due to various services provided to the Company
in connection with the closing of its operations in Pueblo, Colorado. In
addition, Mr. Farley is a partner in the law firm of Petersen, Fonda, Farley,
Mattoon Crockenberg & Garcia ("PFFMC&G"). Two of Mr. Farley's partners in
PFFMC&G purchased a building from the Company in 1999 in Pueblo, Colorado for
$405,000. It is contemplated that a portion of the building will be leased to
PFFMC&G upon completion of its current renovation. PFFMC&G was also an employer
group of a Company subsidiary in 1999. Premiums paid by such firm to this
Company subsidiary totaled approximately $38,000 in 1999.
Mr. Troubh, a director of the Company, was a director of Olsten Corporation,
a temporary staffing agency, in 1999. The Company and certain of its
subsidiaries paid this staffing agency an aggregate of approximately
$11.0 million in 1999 for various staffing services.
Since January 1, 1998, each of the following current and former executive
officers of the Company received one-time loans from the Company in the amounts
indicated in connection with their hire or relocation: Cora Tellez ($400,000),
Karen Coughlin ($100,000), Steven Erwin ($125,000), Ross Henderson ($150,000),
Karin Mayhew ($300,000) and B. Curtis Westen ($250,000). The loans accrue
interest at the Prime Rate and each is payable upon demand by the Company in the
event of a voluntary termination of employment of the respective officer or
termination for Cause (as defined in their respective employment agreements).
The principal and interest of the loans will be forgiven by the Company at
varying times between one and five years after the date of hire or relocation of
the respective officers. A loan will be forgiven prior to such time in the event
the respective officer's employment is terminated involuntarily without Cause,
voluntarily due to Good Reason following a Change of Control (each as defined in
their respective employment agreements), or due to death or disability. Income
incurred by an officer due to interest on such loans (but not the principal)
being forgiven is "grossed up" by the Company to cover the income taxes due upon
such interest forgiveness. As of March 30, 2000, the remaining principal under
each of the loans is as follows: Cora Tellez ($400,000), Karen Coughlin
($50,000), Steven Erwin ($125,000), Ross Henderson ($0), B. Curtis Westen
($166,667) and Karin Mayhew ($300,000).
Under the relevant provisions of California law, when a corporation converts
from nonprofit to for-profit corporate status, the equivalent of the fair market
value of the nonprofit corporation must be contributed to a successor charity
that has a charitable purpose consistent with the purposes of the nonprofit
entity. The CWF was formed to be the charitable recipient of the conversion
settlement when Health Net (a subsidiary of the Company) effected a conversion
from nonprofit to for-profit status, which occurred in February 1992 (the
"Conversion"). In connection with the Conversion, Health Net issued to the CWF
promissory notes in the original principal amount of $225 million (the "CWF
Notes") and shares of Class B Common Stock (which immediately prior to the HSI
Combination were split to become
12
<PAGE>
25,684,152 shares of Class B Common Stock then held by the CWF). While such
shares are held by the CWF, they are entitled to the same economic benefit as
Class A Common Stock, but are non-voting in nature. If the CWF sells or
transfers such shares to an unrelated third party, they automatically convert
into shares of Class A Common Stock.
Pursuant to the Amended California Wellness Foundation Shareholder
Agreement, dated as of January 28, 1992 (the "CWF Shareholder Agreement") by and
among the Company, the CWF and certain stockholders of H.N. Management
Holdings, Inc., a predecessor to the Company ("HNMH"), named therein, the CWF
was subject to various volume and manner of sale restrictions specified in the
CWF Shareholder Agreement which limited the number of shares of Class B Common
Stock that the CWF could dispose of prior to December 31, 1998.
As a result of various sales of Class B Common Stock by CWF, CWF has
gradually reduced its holdings and, as of March 17, 2000, held 563,742 shares of
Class B Common Stock. On November 15, 1999, the remaining $13,482,745 in
principal and interest outstanding under the CWF Notes was paid off. As a
result, the CWF Notes are no longer outstanding.
ACTIVITIES OF THE BOARD OF DIRECTORS AND ITS COMMITTEES
Members of the Board of Directors are elected by the holders of Class A
Common Stock of the Company and represent the interests of all stockholders. The
Board of Directors meets periodically to review significant developments
affecting the Company and to act on matters requiring board approval. Although
the Board of Directors delegates many matters to others, it reserves certain
powers and functions to itself.
The Company's Board of Directors met a total of eight times in 1999. Each
member of the Board of Directors of the Company was present for 75% or more of
the total number of meetings of such Board of Directors and of all committees of
such Board of Directors in 1999 on which he served.
COMMITTEES OF THE BOARD OF DIRECTORS
The By-Laws provide that during the Transition Period (subject to the
ability to override such provisions as set forth in By-Laws), the Audit
Committee, the Committee on Directors and the Compensation and Stock Option
Committee (the "Compensation Committee") of the Board of Directors will each
consist of four independent directors, two of whom shall be HSI Designees and
two of whom shall be FHC Designees, and the Finance Committee will consist of an
equal number of FHC Designees and HSI Designees. During the Transition Period,
the Chairman of each of the Committee on Directors and the Audit Committee will
be selected from the FHC Designees and the Chairman of each of the Compensation
Committee and the Finance Committee will be selected from the HSI Designees.
Following the Transition Period, a majority of the Board of Directors will
select the directors to serve on the committees of the Board of Directors. In
addition to the foregoing committees, in 1998 the Board of Directors established
an Advisory Committee comprised of two FHC Designees and two HSI Designees. The
Advisory Committee was dissolved in May 1999.
AUDIT COMMITTEE. The Audit Committee of the Board of Directors of the
Company currently consists of Messrs. Deukmejian, Farley, Fowler (Chairman) and
Stegemeier, each of whom is a non-employee director. This committee is directed
to review the scope, cost and results of the independent audit of the Company's
books and records, the results of the annual audit with management and the
internal auditors and the adequacy of the Company's accounting, financial and
operating controls; to recommend annually to the Board of Directors the
selection of the independent auditor; to approve the appointment or removal of
the independent auditor; to consider proposals made by the Company's independent
auditor for consulting work; to oversee the Company's compliance with certain
regulatory programs to deter fraud and abuse; and to report to the Board of
Directors, when so requested, on any accounting or financial matters. The
Company's Audit Committee held ten meetings in 1999.
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<PAGE>
COMMITTEE ON DIRECTORS. The Committee on Directors (formerly named the
Nominating Committee) of the Board of Directors of the Company currently
consists of Messrs. Deukmejian (Chairman), Greaves and Hanselman. Mr. Hanselman
served as Chairman of the committee until May 6, 1999, at which time
Mr. Deukmejian became Chairman. Also, during 1999, through May 6, 1999,
Mr. Foley was a member of the Committee on Directors. On such date, Mr. Foley
replaced Mr. Hanselman as a member of the Compensation Committee, as set forth
below, and, in connection therewith, was not re-appointed to the Committee on
Directors. The Committee on Directors is responsible for reviewing
qualifications of individuals suggested as possible candidates for election as
directors of the Company from whatever sources such suggestions arise. In
connection with that direction, the Committee on Directors nominated for
reelection each of the two Class I nominees, both of whose current terms expire
at the Annual Meeting. Stockholders who wish to propose nominations for
directors for consideration at the 2001 Annual Meeting of Stockholders may do so
in accordance with the procedures described below under "REQUIREMENTS AND
PROCEDURES FOR SUBMISSION OF PROXY PROPOSALS AND NOMINATIONS OF DIRECTORS BY
STOCKHOLDERS--Nominations for the Board of Directors." The Company's Committee
on Directors held three meetings in 1999.
COMPENSATION AND STOCK OPTION COMMITTEE. The Compensation Committee
currently consists of Messrs. Bouchard (Chairman), Farley, Foley and Troubh. In
1999, the Compensation Committee consisted of Messrs. Bouchard (Chairman),
Farley, Hanselman and Troubh through May 6, 1999, on which date Mr. Foley
replaced Mr. Hanselman as a committee member due to Mr. Hanselman's expanded
duties as the new Chairman of the Board of Directors. Each of such members is an
"outside director" as such term is defined in Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"). The By-Laws and the policies of
the Board of Directors direct the Compensation Committee: (a) to recommend to
the Board of Directors the compensation, including direct regular compensation,
stock options or other appropriate incentive plans, and perquisites, if any, of
the two most highly compensated Corporate Officers (as defined in the By-Laws)
of the Company, which recommendations are subject to ratification, modification
or rejection by the Board of Directors; (b) to approve the compensation,
including direct regular compensation, stock options or other appropriate
incentive plans, and perquisites, if any, of up to thirty-five senior officers
of the Company and its subsidiaries including the two Corporate Officers covered
in (a) above, which senior officers are designated by the Compensation Committee
in consultation with management; (c) to review and approve, on a general policy
level basis only, the compensation and benefits of officers, managers and
employees other than those covered in (a) and (b) above, based on management's
presentation of all relevant factors of proposed actions in totality, and advise
the Board of Directors of actions taken, and such compensation and benefit
matters shall be deemed within the Compensation Committee's general oversight;
(d) to recommend to the Board of Directors corporate-wide policies with respect
to direct regular compensation, stock options or other appropriate incentive
plans, and perquisites, if any; (e) to administer and implement the Company's
stock option or other stock-based and equity-based benefit plans (the "Plans"),
including the review and approval of all grants thereunder; (f) to fulfill the
purposes of the Plans including, without limitation, through the conditional
grant of options and other benefits under the Plans; (g) to recommend to the
Board of Directors any revisions or additions to the Plans; (h) to recommend to
the Board of Directors appropriate actions with respect to modification,
revision or termination of trusteed employee benefit or welfare plans (such as
401(k) or pension plans), with action with respect to such trusteed plans being
reserved to the Board of Directors; and (i) to review and report to the Board of
Directors, when so requested, on any compensation matter. In 1999, the Company's
Compensation Committee held eight meetings.
FINANCE COMMITTEE. The Finance Committee of the Board of Directors of the
Company currently consists of Messrs. Foley, Greaves (Chairman), Stegemeier and
Troubh. During 1999, and until retirement from the Board of Directors in March
of 1999, Dr. Hasan was a member (and chairman) of the Finance Committee and,
until May 6, 1999, Mr. Hanselman was also member of the Finance Committee. This
committee is directed and empowered to review the Company's investment policies
and guidelines; monitor performance of the Company's investment portfolio; in
coordination with the Audit Committee,
14
<PAGE>
review the Company's financial structure and operations in light of the
Company's long-term objectives; and review and recommend to the Board of
Directors appropriate action on proposed acquisitions and divestitures. Among
other responsibilities, the Committee establishes appropriate authority levels
for various officials of the Company with respect to mergers and acquisitions
transactions, divestiture transactions and capital expenditures. The Committee
also reviews and recommends appropriate action with respect to the Company's
short- and long-term debt structure. The Company's Finance Committee held five
meetings in 1999.
ADVISORY COMMITTEE. During 1999, until its dissolution in May 1999, the
Advisory Committee consisted of Messrs. Deukmejian, Foley, Greaves and Hanselman
(Chairman). This committee's responsibilities included consulting with the Chief
Executive Officer on Company operations and organizational initiatives;
monitoring the areas of Company performance, personnel evaluation and
recruitment; and providing counsel on other matters as requested by the Chief
Executive Officer. The Company's Advisory Committee held one meeting in 1999.
15
<PAGE>
REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEE ON
EXECUTIVE COMPENSATION FOR FISCAL YEAR 1999
INTRODUCTION AND BACKGROUND
The following report is provided in accordance with the rules of the
Securities and Exchange Commission and covers compensation policies applicable
to the executive officers of Foundation Health Systems, Inc. (the "Company")
during 1999. The report has been approved by the members of the Compensation and
Stock Option Committee of the Board of Directors of the Company (the
"Compensation Committee").
During 1999, the Compensation Committee was comprised of "outside directors"
(within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code")). From January 1, 1999 through May 6, 1999
Messrs. Bouchard (Chairman), Hanselman, Farley and Troubh served on the
Compensation Committee. Effective May 6, 1999 Mr. Hanselman resigned as a member
of the Committee due to his additional duties as the new Chairman of the Board
of Directors and Mr. Foley replaced him as a member of the Compensation
Committee. As of the date of this report, the Compensation Committee continues
to be comprised of these four members.
Under the Company's By-Laws, the Compensation Committee is responsible for
recommending to the Board of Directors the compensation levels of the Chief
Executive Officer and the most highly compensated officer other than the Chief
Executive Officer and approving the compensation levels of certain other senior
executives, including the "Named Executive Officers" listed below in the Summary
Compensation Table. The Compensation Committee is also responsible for the
administration of the Company's stock option and other stock-based and
equity-based plans.
COMPENSATION PHILOSOPHY
The Compensation Committee designed the current compensation system to
include three components: base salary, short-term incentive pay in the form of
an annual cash incentive opportunity and long-term equity-based incentive
compensation. Compensation decisions were based upon competitive market pay
practices, corporate or unit performance and individual contributions. The
Compensation Committee, with the assistance of independent consultants,
developed base line and target compensation levels based on a comprehensive
analysis of pay practices of a group of eight publicly traded healthcare
organizations with annual revenues ranging from $6.5 billion to $20.6 billion.
These companies comprise the "Selected Peer Group" in the stock performance
graph set forth later in this Proxy Statement.
The Compensation Committee's philosophy is to establish base salaries below
the median for the peer group, but to provide an opportunity for total cash
compensation (base salary plus annual cash incentive) to reach the top quartile
based on corporate performance. In this way, the Compensation Committee seeks to
have a significant portion of annual compensation at risk. The Compensation
Committee uses stock options to directly align executive's long-term financial
interests with the stockholders and advance the interests of the Company by
attracting and retaining talented executives. Stock Option grants are positioned
to provide total compensation at the 75(th) percentile based on corporate
performance. Stock options are considered effective long-term incentives by the
Compensation Committee because an executive receives a gain only if the
Company's stock value increases and its stockholders also receive a gain. The
Compensation Committee intends to continue to use stock options as the primary
element of long-term compensation for the Company's executive officers.
Stock options granted in 1998 and later provide for termination of the
options and a "clawback" of realized gains if the executive joins a competitor
of the Company within six months after termination of employment, and the
options also include a provision prohibiting any activities competitive to the
Company for a period of up to twelve months post-termination, depending on the
optionee's level in the organization.
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<PAGE>
BASE SALARY
Mr. Gellert's base salary was increased to $500,000 in August 1997 upon his
promotion to President of the Company. When Mr. Gellert was promoted to
President and Chief Executive Officer of the Company in August 1998, his annual
base salary remained the same and was not adjusted in 1999. Mr. Gellert's annual
base salary in 1999 was well below the 25th percentile of the selected peer
group. Effective February 14, 2000 the Compensation Committee approved
increasing Mr. Gellert's annual base salary to $600,000, which continues to be
below the 25th percentile of the peer group. The Compensation Committee also
increased the base salaries of Mr. Velasquez, Ms. Tellez and Ms. Coughlin to
$400,000 effective February 14, 2000. These increases reflect the compensation
analysis provided by the Company's independent consultants.
ANNUAL CASH INCENTIVE
Pursuant to the Company's Performance-Based Annual Bonus Plan (the "Existing
Bonus Plan") applicable for 1999 previously adopted by its stockholders, annual
cash incentives for the Named Executive Officers, including the Chief Executive
Officer, are based on consolidated income from operations before taxes, as
determined in accordance with generally accepted accounting principles. Under
the Existing Bonus Plan applicable for 1999, a cash pool in the amount of
$7.5 million was to be established, provided that the annual performance goal of
more than $250 million of consolidated income from operations before taxes was
achieved. This performance goal was not met for 1999. As a result, no incentives
were paid under the Existing Bonus Plan for 1999.
The Compensation Committee has adopted a new Executive Officer Incentive
Plan (the "New Incentive Plan"), subject to stockholder approval, that is to
become effective January 1, 2000. The New Incentive Plan is described elsewhere
in this Proxy Statement. In the event that the Company's stockholders approve
the New Incentive Plan, the Existing Bonus Plan will terminate.
Under the Company's Management Incentive Plan, corporate and business unit
management associates earn annual incentive payments if corporate, business unit
and/or individual goals are met. Based on 1999 business unit and individual
performance, the Committee has approved partial incentive payments under the
Management Incentive Plan to Named Executive Officers who achieved or exceeded
their 1999 goals. No annual incentive is being paid to Mr. Gellert for 1999
because while the Company's overall performance improved, predetermined goals
were not met. All of the incentive payments made to the Named Executive Officers
for 1999 will be tax deductible to the Company.
STOCK OPTIONS
The Company last granted stock options to the Chief Executive Officer and
certain of the Named Executive Officers in 1998. Although no option grants were
made in 1999 to the Chief Executive Officer or to any of the Named Executive
Officers, the Compensation Committee has approved stock option grants to certain
of these executives in February 2000. In determining the number of options to be
granted, the Compensation Committee considered the advice of outside
consultants, which was based upon the competitive practices at the group of peer
companies, internal equity and each individual executive's position and
potential for helping the Company to achieve its long-term objectives. All of
such options granted to the Named Executive Officers have exercise prices equal
to the fair market value of the underlying shares on the date of grant.
The Company provides benefits for the Named Executive Officers and other
senior executives in the event of a change in control. Under the form of
Severance Payment Agreement adopted by the Committee in 1998, the Named
Executive Officers executing such agreement would receive three times base
salary plus continued health and welfare benefit coverage for three years if
involuntarily terminated (or constructively terminated) within two years after a
change in control. In addition, vesting of stock options held by the Named
Executive Officers, including Mr. Gellert, accelerates upon a change in control
17
<PAGE>
pursuant to the terms of the Company's stock option plans. Change in control
benefits are subject to reduction to the extent such reduction would improve the
executive's after-tax position by eliminating any excise taxes otherwise imposed
on the employee under the parachute payment provisions of the Code.
In the event of Mr. Gellert's involuntary termination other than for cause
or his involuntary (or constructive) termination within two years following a
change in control, he would receive a $5 million severance benefit. Under the
Company's standard Severance Payment Agreement, terminated executives are
precluded from competing with the Company for a period of up to one year
post-termination, depending on the applicable circumstances. Mr. Gellert is also
precluded from competing with the Company for a period of one year
post-termination under his severance arrangement with the Company.
COMPENSATION DEDUCTIBILITY POLICY
The Compensation Committee's policy with respect to the tax deductibility of
compensation in excess of $1 million payable to each of the Named Executive
Officers is to comply with the requirements of Section 162(m) of the Code
applicable to qualified performance-based compensation to the extent such
compliance is practicable and in the best interest of the Company and its
stockholders.
J. Thomas Bouchard, Chairman
Patrick Foley
Thomas T. Farley
Raymond S. Troubh
Dated: March 30, 2000
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<PAGE>
STOCK PERFORMANCE GRAPH
The following graph compares the performance of the Company's Class A Common
Stock with the performance of the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index") and a peer group index from December 30, 1994 (the
last trading day of 1994) to December 31, 1995, 1996, 1997, 1998 and 1999. The
graph assumes that $100 was invested on December 30, 1994 in each of the
Class A Common Stock, the S&P 500 Index and the peer group index, and that all
dividends were reinvested.
The Company has created a peer group index that includes the following
companies: Humana Inc., PacifiCare Health Systems, Inc., WellPoint Health
Networks Inc., United Healthcare Corporation, Oxford Health Plans, Inc.,
Aetna, Inc., Tenet Healthcare Corporation and Columbia/HCA Healthcare
Corporation. The peer group index weighs the constituent companies' stock
performance on the basis of market capitalization at the beginning of the
period.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG FOUNDATION HEALTH
SYSTEMS, INC., S&P 500 INDEX AND PEER GROUP INDEX
FROM DECEMBER 30, 1994 TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
FOUNDATION HEALTH S&P 500 SELECTED
SYSTEMS, INC. INDEX PEER GROUP
----------------- -------- ----------
<S> <C> <C> <C>
December 30, 1994........................................ $100 $100 $100
December 31, 1995........................................ $106 $138 $140
December 31, 1996........................................ $ 81 $169 $146
December 31, 1997........................................ $ 73 $226 $126
December 31, 1998........................................ $ 39 $290 $123
December 31, 1999........................................ $ 33 $351 $118
</TABLE>
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<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following tables and descriptive materials set forth separately, for the
fiscal years indicated, each component of compensation paid or awarded to, or
earned by, Mr. Gellert, the Chief Executive Officer of the Company during 1999,
and each of the four other most highly compensated executive officers of the
Company serving as of the end of the 1999 calendar year (collectively, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------------- ---------- ---------
SECURITIES
UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS OPTIONS/ PAYOUTS COMPENSATION
WITH THE COMPANY YEAR (1) ($) OTHER ANNUAL SARS(#) ($) ($)
- --------------------------- -------- --------- -------- ------------ ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jay M. Gellert........... 1999 500,000 0 68,077(2) 0 0 894(3)
President and Chief 1998 500,000 0 500,000 0 894(4)
Executive Officer 1997 450,000 0 0 600,000 0 866(5)
Cora Tellez.............. 1999 350,000 183,750 68,235(6) 0 0 2,199(7)
President of Western 1998 40,385(8) 0 0 200,000 0 52(9)
Division 1997 N/A -- -- -- -- --
Gary S. Velasquez........ 1999 350,000 183,750 0 0 0 5,426(10)
President of New 1998 350,000 0 0 200,000 0 5,426(11)
Ventures Group 1997 316,347 0 0 175,000 0 5,317(12)
Karen Coughlin........... 1999 350,000 147,000 143,897(13) 0 0 19,766(14)
President of Eastern 1998 53,846(15) 0 0 400,000 0 0
Division 1997 N/A -- -- -- -- --
Maurice Costa............ 1999 350,000 129,042 0 0 0 31,708(16)
President of Employer 1998 350,000 75,000 0 0 0 34,585(17)
and Occupational Services 1997 320,579 125,000 0 115,000 0 36,071(18)
Division
</TABLE>
- ------------------------
(1) Includes amounts deferred pursuant to the FHC Deferred Compensation Plan
and the Company's (and FHC's) Profit Sharing and 401(k) Plans.
(2) Represents $65,337 paid for housing and travel benefits, including the tax
gross-up on such items, and $2,740 for miscellaneous benefits.
(3) Represents premiums paid by the Company on a life insurance policy.
(4) Represents premiums paid by the Company on a life insurance policy.
(5) Represents premiums paid by the Company on a life insurance policy.
(6) Represents amounts paid for housing and travel benefits including the tax
gross-up on such items.
(7) Represents matching contributions under the Company's 401(k) Plan of $1,573
and premiums paid by the Company on a life insurance policy of $626.
(8) Reflects a partial year's salary since Ms. Tellez joined the Company on
November 16, 1998.
(9) Represents premiums paid by the Company on a life insurance policy.
20
<PAGE>
(10) This amount includes $4,800 in matching contributions under the Company's
401(k) Plan and $626 in premiums paid by the Company on a life insurance
policy.
(11) This amount includes $4,800 in matching contributions under the Company's
401(k) Plan and $626 in premiums paid by the Company on a life insurance
policy.
(12) This amount includes $4,750 in matching contributions under the Company's
401(k) Plan and $567 in premiums paid by the Company on a life insurance
policy.
(13) Represents amounts paid by the Company for housing and travel benefits,
including the tax gross-up on such items.
(14) This amount includes $19,140 for various relocation benefits paid for by
the Company and $626 in premiums paid by the Company on a life insurance
policy.
(15) Reflects a partial year's salary since Ms. Coughlin joined the Company on
October 28, 1998.
(16) This amount includes $2,133 in matching contributions under the Company's
401(k) Plan, $28,949 deemed to be compensation under the rules of the SEC
related to the present value of premiums by the Company for the benefit of
Mr. Costa under a split dollar life insurance program and $626 in premiums
paid by the Company on a life insurance policy.
(17) This amount includes $4,000 in matching contributions under the Company's
401(k) Plan, $29,959 deemed to be compensation under the rules of the SEC
related to the present value of premiums paid by the Company for the
benefit of Mr. Costa under a split dollar life insurance program, $626 in
premiums paid by the Company on a life insurance policy and $4,594 in
premiums paid by the Company on a disability insurance policy.
(18) This amount includes $3,964 in matching contributions under the Company's
401(k) Plan, $31,481 deemed to be compensation under the rules of the SEC
related to the present value of premiums paid by the Company for the
benefit of Mr. Costa under a split dollar life insurance program and $626
in premiums paid by the Company on a life insurance policy.
21
<PAGE>
OPTION GRANTS IN 1999
No options grants were made during 1999 to the Named Executive Officers of
the Company.
OPTION EXERCISES IN 1999
The following table summarizes the number and value of options exercised
during 1999, as well as the number and value of unexercised options as of
December 31, 1999, held by the Named Executive Officers of the Company.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS/AS OF OPTIONS/SARS AS OF
ACQUIRED ON DECEMBER 31, 1999(A) DECEMBER 31, 1999(B)
EXERCISE VALUE ------------------------------ ---------------------------
NAME (#) REALIZED ($) EXERCISABLE(C) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------ -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jay M. Gellert................ 0 N/A 500,000 700,000 0 0
Cora Tellez................... 0 N/A 66,666 133,334 0 0
Gary S. Velasquez............. 0 N/A 158,266 258,334 0 0
Karen Coughlin................ 0 N/A 44,000 356,000 0 0
Maurice Costa................. 0 N/A 157,916 38,334 0 0
</TABLE>
- ------------------------
(a) The exercise price of outstanding options held by the Named Executive
Officers at December 31, 1999 ranges from $10.84 to $32.50 per share. All
options held by the Named Executive Officers have exercise prices equal to
the fair market value of the underlying shares on the date of grant.
(b) Based on the difference between the closing price of $9.9375 of Class A
Common Stock on the NYSE on December 31, 1999 (the last trading day in 1999)
and the option exercise price.
(c) Under the terms of the Company's Second Amended and Restated 1991 Stock
Option Plan, all outstanding options on October 1, 1996 of Mr. Gellert
became exercisable on October 1, 1996 as a result of approval by the Board
of Directors of the FHS Combination. Under the terms of the employment
agreement between each of Mr. Velasquez and Mr. Costa and FHC, options
granted to Mr. Velasquez and Mr. Costa under the FHC 1990 Stock Option Plan
and outstanding as of April 1, 1997 became exercisable on such date upon
consummation of the FHS Combination.
SUPPLEMENTAL EXECUTIVE RETIREMENT PROGRAMS
HSI had in effect through December 31, 1995 a Supplemental Executive
Retirement Plan ("SERP") program that allowed executives to defer income on a
non-qualified pre-tax basis. A new SERP was approved by HSI effective
January 1, 1996. The new SERP ensures that executives who retire upon or after
age 62 and who have worked for HSI or a predecessor organization for at least
15 years receive 50% of average pay (salary and bonus) when combined with Social
Security and all other employer provided retirement benefits provided under
current and prior programs. These programs include the accumulated value of
Company contributions to the Company's 401(k) plan and benefits accrued under
the prior SERP. Executives with less than 15 years of service at age 62 will
receive a reduced benefit under the new SERP, and executives must accrue at
least five years of service to receive a partial benefit. Those terminating with
between 5 and 10 years of service are entitled to receive a partial benefit, and
executives who terminate with 10 or more years of service will be 100% vested on
earned benefits. Monthly accrued benefits payable at age 62 and accrued through
December 31, 1999 under this program for the Named Executive Officers are:
Mr. Gellert, $3,108; Ms. Tellez, $367; Ms. Coughlin, $361; Mr. Velasquez, $0;
and Mr. Costa, $0.
22
<PAGE>
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
EMPLOYMENT AGREEMENT WITH MR. GELLERT. Mr. Gellert has a revised Employment
Letter Agreement with the Company dated August 22, 1997, which was amended as of
March 2, 2000 (as so amended, the "Gellert Agreement"). Under the Gellert
Agreement, during the term of his employment Mr. Gellert is eligible to
participate in various insurance, stock option, pension, incentive compensation
and other fringe benefit plans and programs of the Company. Mr. Gellert also is
reimbursed for reasonable business expenses in performing his duties and is
provided with a monthly automobile allowance.
The Gellert Agreement provides Mr. Gellert with two potential severance
arrangements. If during a two-year period following a "change-of-control"
transaction, the Company terminates the employment of Mr. Gellert or he
voluntarily resigns for "good reason" (each as defined in the Gellert Agreement)
he will receive severance pay of $5 million; provided that such severance pay
may not exceed the applicable limitations under Section 280G of the Code (to
avoid penalty taxes and deduction limitations on "excess parachute payments")
but the Company agrees to consider in good faith proposals to restructure such
pay in the event such pay is limited by Section 280G. If the Company terminates
the employment of Mr. Gellert other than following a change-of-control and other
than for "just cause" (each as defined in the Gellert Agreement), Mr. Gellert
will be also entitled to receive a severance payment equal to $5 million.
EMPLOYMENT AGREEMENT WITH MS. TELLEZ. Ms. Tellez has an Employment Letter
Agreement with the Company dated November 16, 1998 (the "Tellez Agreement").
Under the Tellez Agreement, Ms. Tellez is eligible to participate in various
insurance, stock option, pension, incentive compensation and other fringe
benefit plans and programs of the Company. Under the agreement she was also
provided a one-time loan in the amount of $400,000 (with interest accrued at the
Prime Rate), the principal and interest of which loan were to be forgiven by the
Company one-half on each of the first and second anniversaries of Ms. Tellez'
date of hire. The loan was restructured in 1999 such that the principal and
interest will be forgiven one-half on each of the second and third anniversaries
of Ms. Tellez' date of hire. See "Certain Relationships and Related
Transactions" above for additional information regarding this one-time loan to
Ms. Tellez.
The Tellez Agreement also provides that the Company shall afford to
Ms. Tellez, in lieu of relocation benefits, a furnished business apartment in
Woodland Hills, California and air travel as required between Woodland Hills and
Oakland, California for the duration of her employment with the Company.
Severance payment provisions contained in the Tellez Agreement were
superseded by the Company's Severance Payment Agreement dated December 4, 1998
(as amended) which was entered into between the Company and Ms. Tellez. See "New
Severance Agreement" below for a description of agreement.
EMPLOYMENT AGREEMENT WITH MS. COUGHLIN. Ms. Coughlin has an Employment
Letter Agreement with the Company dated March 12, 1998 (the "Coughlin
Agreement"). Under the Coughlin Agreement, Ms. Coughlin is eligible to
participate in various insurance, stock option, pension, incentive compensation
and other fringe benefit plans and programs of the Company. Under the agreement
she was also provided a one-time loan in the amount of $100,000 (with interest
accrued at the Prime Rate), the principal and interest of which loan are to be
forgiven by the Company one-half on each of the first and second anniversaries
of Ms. Coughlin's date of hire. See "Certain Relationships and Related
Transactions" above for additional information regarding this one-time loan to
Ms. Coughlin.
The Coughlin Agreement also provides that the Company shall afford to
Ms. Coughlin, in lieu of relocation benefits, a business apartment in New York
City and air travel to and from Chicago, Illinois for Ms. Coughlin and/or her
family members on a weekly basis for the duration of her employment with the
Company.
23
<PAGE>
The Coughlin Agreement provides Ms. Coughlin with two potential severance
arrangements. If during a two-year period following a "change-of-control"
transaction, the Company terminates her employment or she voluntarily resigns
for "good reason" (each as defined in the Coughlin Agreement) she will receive
severance pay equal to three years of her then current annual base salary plus
three years of continued benefits. If the Company terminates the employment of
Ms. Coughlin other than following a change-of control and other than for "just
cause" she will be entitled to receive a severance payment equal to two years of
her then current annual base salary plus two years of continued benefits.
EMPLOYMENT AGREEMENT WITH MR. VELASQUEZ. Pursuant to the FHS Combination,
the Company assumed the employment letter agreement between Foundation Health
Corporation and Mr. Velasquez dated May 1, 1996 (the "Velasquez Agreement").
Under the Velasquez Agreement, Mr. Velasquez is eligible to participate in
various insurance, stock option, pension, incentive compensation and other
fringe benefit plans of the Company. Mr. Velasquez is also reimbursed for
reasonable business expenses in performing his duties.
The Velasquez Agreement provides Mr. Velasquez with two potential severance
arrangements. If during a two-year period following a "change-of-control"
transaction, the Company terminates the employment of Mr. Velasquez or he
voluntarily resigns for "good reason" (each as defined in the Velasquez
Agreement), he will receive severance payments equal to one and one-half years
of his then current annual base salary, his awards under benefit plans will
become fully vested, and he will continue to participate in the Company's group
insurance plans for a period of one year. Such severance payments will not
exceed the applicable limitations under Section 280G of the Code (to avoid
penalty taxes and deduction limitations on "excess parachute payments").
If the Company terminates the employment of Mr. Velasquez other than
following a change-of-control and other than for "cause" or "disability" (each
as defined in the Velasquez Agreement), Mr. Velasquez will be entitled to
receive a severance payment equal to his then current annual base salary payable
ratably over twelve months. In addition, Mr. Velasquez will continue to
participate in the Company's insurance plans for a period of one year. Under the
Velasquez Agreement, any such payments made to Mr. Velasquez will be reduced to
the extent they would exceed the applicable limitations under Section 280G (to
avoid penalty taxes and deductions limitations on "excess parachute payments")
or Section 4999 (for Mr. Velasquez to avoid excise taxes) of the Code.
EMPLOYMENT AGREEMENT WITH MR. COSTA. The Company entered into a three-year
employment letter agreement with Mr. Costa dated December 31, 1997 (the "Costa
Agreement"). The Costa Agreement provides for a special bonus at the
commencement of the employment term and a retention bonus payable one-half at
the time of commencement and one-half on the first anniversary of commencement.
In return for such bonus provisions, Mr. Costa agreed to forfeit 60,000 shares
of common stock underlying options previously granted to him. Under the Costa
Agreement, Mr. Costa is eligible to participate in various insurance, stock
option, pension, incentive compensation and other fringe benefit plans of the
Company. Under the Costa Agreement, Mr. Costa is also reimbursed for reasonable
business expenses in performing his duties.
The Company and Mr. Costa entered into a Severance Payment Agreement dated
April 6, 1998 (the "Costa Severance Agreement"). Under the Costa Severance
Agreement, in the event Mr. Costa's employment is terminated without cause
within two years of a Change of Control or he voluntarily terminates his
employment for Good Reason (each as defined in the Costa Severance Agreement),
Mr. Costa shall be entitled to a lump sum payment equal to three times his then
current base salary and continuation of all health and welfare benefit coverage
for a period of three years. If termination of Mr. Costa's employment without
cause occurs at any time other than within two years after a Change of Control
(as defined in the Costa Severance Agreement), Mr. Costa shall be entitled to a
lump sum payment equal to one times his then current base salary. Any such
severance payments shall be reduced so
24
<PAGE>
as not to exceed the limitations under Section 280G of the Code (to avoid
penalty taxes and deduction limitations on "excess parachute payments").
NEW SEVERANCE AGREEMENT. On December 4, 1998, the Compensation Committee
approved a new form of severance payment agreement (the "New Severance Payment
Agreement") to be entered into between the Company and each of the Named
Executive Officers, other than Messrs. Gellert and Costa (each of whom has his
own individualized severance arrangement). Under such severance agreement, the
executive would receive three times base salary plus continued health and
welfare benefit coverage for three years if involuntarily terminated (or
constructively terminated) within two years after a change in control (as
defined therein). Change in control benefits are subject to reduction to the
extent such reduction would improve the executive's after-tax position by
eliminating any excise taxes otherwise imposed on the executive under the
parachute payment provisions of the Code. Under such severance agreements,
terminated executives are precluded from competing with the Company for a period
of up to one year post-termination, depending on the applicable circumstances,
and must enter into a Waiver and Release of Claims in order to receive severance
payments. Upon execution of the new severance agreement, such agreement will
supersede any prior severance payment agreements or arrangements. As set forth
above, Ms. Tellez has executed the New Severance Payment Agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Decisions regarding the Company's executive compensation are made by the
Compensation Committee. In 1999, the Compensation Committee consisted of
(i) from January 1, 1999 through May 6, 1999, Messrs. Bouchard (Chairman),
Farley, Hanselman and Troubh and (ii) from May 6, 1999 through December 31,
1999, Messrs. Bouchard (Chairman), Farley, Foley and Troubh. Each of these
members is an "outside director" (within the meaning of Section 162(m) of the
Code).
The following information relates to transactions by the Company with the
foregoing members of the Compensation Committee of the Company.
Mr. Bouchard, a director of the Company, is Senior Vice President, Human
Resources of IBM. During 1999, the Company and its subsidiaries engaged IBM as a
consultant with respect to various technology, information systems, hardware and
other matters, including management of its Year 2000 program. During 1999, the
Company paid IBM approximately $9.0 million in consulting fees.
Mr. Farley, a director of the Company, was paid an aggregate of $95,000 in
consulting fees in 1999 and 2000 due to various services provided to the Company
in connection with the closing of its operations in Pueblo, Colorado. In
addition, Mr. Farley is a partner in the law firm of Petersen, Fonda, Farley,
Mattoon Crockenberg & Garcia ("PFFMC&G"). Two of Mr. Farley's partners in
PFFMC&G purchased a building from the Company in 1999 in Pueblo, Colorado for
$405,000. It is contemplated that a portion of the building will be leased to
PFFMC&G upon completion of its current renovation. PFFMC&G was also an employer
group of a Company subsidiary in 1999. Premiums paid by such firm to this
Company subsidiary totaled approximately $38,000 in 1999.
25
<PAGE>
DIRECTORS' COMPENSATION FOR 1999
During 1999, the annual retainer payable to non-employee directors of the
Company was $30,000 per year, and each non-employee director who chaired the
Audit Committee, Compensation Committee, Committee on Directors or Finance
Committee was eligible to receive an additional annual retainer of $5,000. Such
non-employee directors also received a $2,000 fee for each meeting of the Board
of Directors attended, and a $1,000 fee for each committee meeting attended. In
lieu of these retainer and meeting fees Mr. Hanselman receives $10,000 per month
for his services as Chairman of the Board of Directors of the Company (which
monthly payments commenced in May of 1999 when he was elected to this office).
No fees are paid to employees of the Company for service as a director. Upon
Dr. Hasan's retirement as Chief Executive Officer in August 1998, he received
$165,000 under his Retirement Agreement for continuing service as Chairman of
the Board of Directors through March 1, 1999 and was not eligible for any
compensation paid to non-employee directors.
In addition, in 1999 non-employee directors of the Company participated in
the Company's Third Amended and Restated Non-Employee Director Stock Option Plan
(the "Director Plan"), which was approved by the Company's stockholders at the
1997 Annual Stockholders Meeting and which provides for initial grants and
automatic annual grants of nonqualified stock options to such directors. Each
such grant entitles the optionee to purchase 7,500 shares of Class A Common
Stock at an exercise price equal to the fair market value of Class A Common
Stock on the date of such grant. Each grant vests as to 33 1/3% of the shares
each year on the anniversary of the date of the grant, provided that the options
become immediately exercisable in the event of a "change in control" of the
Company, as defined in the Director Plan. Under the Director Plan, 500,000
shares of Class A Common Stock have been reserved for grant.
On May 7, 1999, options to purchase 7,500 shares at an exercise price of
$16.25 per share were thereby granted to each of Messrs. Bouchard, Deukmejian,
Farley, Foley, Fowler, Greaves, Hanselman, Stegemeier and Troubh pursuant to the
formula provisions of the Director Plan.
Effective May 1, 1998, the Company adopted a deferred compensation plan
pursuant to which both officers and non-employee directors are eligible to defer
up to 100% of their compensation. The compensation deferred under such plan is
credited with earnings or losses measured by the rate of return on investments
elected by plan participants. Each plan participant is fully vested in all
deferred compensation and earnings credited to his or her account.
26
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Set forth below is a tabulation indicating those persons or groups who are
known to the Company to be beneficial owners of more than 5% of the outstanding
shares of the Company's Class A Common Stock as of the Record Date. The
following information is based on reports on Schedule 13D or 13G filed with the
Securities and Exchange Commission or other reliable information.
<TABLE>
<CAPTION>
PERCENT
AMOUNT AND NATURE OF OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) CLASS
- ------------------------------------ ------------------------ --------
<S> <C> <C>
Legg Mason, Inc............................................. 12,447,091(2) 10.2%
100 Light Street
Baltimore, Maryland 21202
The Prudential Insurance Company of America................. 11,192,697(3) 9.2%
751 Broad Street
Newark, New Jersey 07102-3777
Sanford C. Bernstein & Co., Inc............................. 9,865,950(4) 8.1%
767 Fifth Avenue
New York, New York 10153
Wellington Management Company, LLP.......................... 8,318,660(5) 6.8%
75 State Street
Boston, Massachusetts 02109
Invista Capital Management, LLC............................. 7,805,563(6) 6.4%
699 Walnut, 1900 Hub Tower
Des Moines, Iowa 50309
Principal Mutual Holding Company............................ 7,805,563(7) 6.4%
711 High Street
Des Moines, Iowa 50392-0088
CitiGroup Inc............................................... 6,347,436(8) 5.2%
153 East 53rd Street
New York, New York 10043
Salomon Smith Barney Holdings Inc........................... 6,342,246(9) 5.2%
338 Greenwich Street
New York, New York 10013
Vanguard Windsor Funds-Windsor Fund......................... 6,028,660(10) 4.9%(11)
P. O. Box 2600
Valley Forge, Pennsylvania 19482-2600
</TABLE>
- ------------------------
(1) The nature of beneficial ownership for shares shown in this column is sole
voting and investment power unless otherwise indicated herein, subject to
community property laws where applicable.
(2) Legg Mason, Inc. ("Legg Mason") is a parent holding company whose
subsidiaries Legg Mason Fund Adviser, Inc., Bartlett and Co., Brandywine
Asset Management, Inc. and Legg Mason Capital Management, Inc. are
investment advisers registered under the Investment Company Act of 1940,
whose subsidiary Legg Mason Wood Walker, Inc. is a broker/dealer, and whose
subsidiary Legg Mason Trust, fsb is a unitary thrift institution. Legg
Mason is deemed a beneficial owner for purposes of Rule 13(d) of the
Exchange Act. Legg Mason has sole power to vote or direct the vote of
9,988,075
27
<PAGE>
shares, shared power to vote or direct the vote of 2,459,016 shares and
shared power to dispose or direct the disposition of all of the shares
listed in the table.
(3) The Prudential Insurance Company of America ("Prudential") is deemed a
beneficial owner for purposes of Rule 13(d) of the Exchange Act of the
shares of the Company's Class A Common Stock held for the benefit of its
clients through its separate accounts, externally managed accounts,
registered investment companies, subsidiaries and other affiliates.
Prudential has sole power to vote or direct the vote of 786,060 shares,
shared power to vote or direct the vote of 10,406,637 shares, sole power to
dispose or direct the disposition of 786,060 shares and shared power to
dispose or direct the disposition of 10,406,637 of the shares listed in the
table.
(4) Sanford C. Bernstein & Co., Inc. ("SBC") is a registered investment
adviser/broker dealer. An aggregate of 9,865,950 shares of the Company's
Class A Common Stock are held for the accounts of one or more discretionary
clients of SBC. SBC has sole power to vote or direct the vote of 6,407,260
shares and sole power to dispose or direct the disposition of 9,865,950
shares. In addition, one or more of SBC's clients have appointed an
independent voting agent with instructions to vote an additional 575,158
shares in the same manner as SBC. SBC's clients have the right to receive
dividends from and the proceeds of the sale of such shares.
(5) Wellington Management Company, LLP ("Wellington") is an investment adviser
and, as such, is deemed the beneficial owner for purposes of Rule 13(d) of
the Exchange Act. Wellington has shared power to vote or direct the vote of
442,600 shares and shared power to dispose or direct the disposition of all
of the shares listed in the table. Wellington's clients have the right to
receive dividends from, and the proceeds of, the sale of such shares.
(6) Invista Capital Management, Inc. ("Invista") is an investment adviser and
is deemed the beneficial owner for purposes of Rule 13(d) of the Exchange
Act. Invista has shared power to vote or direct the vote and shared power
to dispose or direct the disposition of the shares listed in the table.
(7) Principal Mutual Holding Company ("PMHC") is a parent holding company and
is deemed the beneficial owner for purposes of Rule 13(d) of the Exchange
Act. PMHC has shared power to vote or direct the vote and shared power to
dispose or direct the disposition of the shares listed in the table.
(8) CitiGroup Inc. is a parent holding company and is deemed the beneficial
owner for purposes of Rule 13(d) of the Exchange Act. CitiGroup Inc. has
shared power to vote or direct the vote and shared power to dispose or
direct the disposition of the shares listed in the table.
(9) Salomon Smith Barney Holdings Inc. ("SSBH") is a parent holding company and
is deemed the beneficial owner for purposes of Rule 13(d) of the Exchange
Act. SSBH has shared power to vote or direct the vote and shared power to
dispose or direct the disposition of the shares listed in the table.
(10) Vanguard Windsor Funds-Windsor Fund ("Vanguard") is an investment company
registered under the Investment Company Act of 1940 and is deemed the
beneficial owner for purposes of Rule 13(d) of the Exchange Act. Vanguard
has sole power to vote or direct the vote and shared power to dispose or
to direct the disposition of the shares listed in the table.
(11) Such holdings represented more than 5% of the Class A Common Stock of the
Company as of December 31, 1999.
28
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the number of shares of Class A Common Stock
beneficially owned by each of the current directors of the Company, by each
Named Executive Officer of FHS in 1999 and by all current directors and
executive officers as a group as of the Record Date, and the percentage that
these shares bear to the total number of shares of Class A Common Stock
outstanding as of such date:
<TABLE>
<CAPTION>
AMOUNT OF SHARES BENEFICIALLY PERCENT
NAME OF INDIVIDUAL OR NUMBER OF PERSONS IN GROUP OWNED(1) OF CLASS
- ------------------------------------------------ ----------------------------- --------
<S> <C> <C>
J. Thomas Bouchard......................................... 35,000(2) *
George Deukmejian.......................................... 35,199(3) *
Thomas T. Farley........................................... 68,000(4) *
Patrick Foley.............................................. 38,500(5) *
Earl B. Fowler............................................. 61,150(6) *
Roger F. Greaves........................................... 49,643(7) *
Richard W. Hanselman....................................... 50,728(8) *
Richard J. Stegemeier...................................... 45,000(9) *
Raymond S. Troubh.......................................... 84,953(10) *
Jay M. Gellert............................................. 458,333(11) *
Maurice Costa.............................................. 159,651(12) *
Karen Coughlin............................................. 44,000(13) *
Cora Tellez................................................ 71,527(14) *
Gary S. Velasquez.......................................... 159,286(15) *
All current executive officers and directors as a group
(18 persons)............................................. 1,703,757(16) 1.4%
</TABLE>
- ------------------------
* The amount shown is less than 1% of the outstanding shares.
(1) The information contained in this table is based upon information furnished
to the Company by the persons named above or obtained from records of the
Company. The nature of beneficial ownership for shares shown in this column
is sole voting and investment power unless otherwise indicated herein,
subject to community property laws where applicable.
(2) Includes 29,500 shares with respect to which Mr. Bouchard has the right to
acquire beneficial ownership by virtue of outstanding vested options and
5,000 shares with respect to which Mr. Bouchard has the right to acquire
beneficial ownership by virtue of outstanding options that vest within
60 days of March 17, 2000.
(3) Includes 30,199 shares with respect to which Mr. Deukmejian has the right
to acquire beneficial ownership by virtue of outstanding vested options and
5,000 shares with respect to which Mr. Deukmejian has the right to acquire
beneficial ownership by virtue of outstanding options that vest within
60 days of March 17, 2000. Such amount also includes 700 shares held in the
C. George Deukmejian Defined Benefit Pension Plan, of which Mr. Deukmejian
is a trustee.
(4) Includes 34,500 shares with respect to which Mr. Farley has the right to
acquire beneficial ownership by virtue of outstanding vested options and
5,000 shares with respect to which Mr. Farley has the right to acquire
beneficial ownership by virtue of outstanding options that vest within
60 days of March 17, 2000. Such amount also includes 10,000 shares held by
the Farley Family Trust over which trust Mr. Farley has investment power.
Mr. Farley disclaims beneficial ownership of the shares held by the Farley
Family Trust.
(5) Includes 33,500 shares with respect to which Mr. Foley has the right to
acquire beneficial ownership by virtue of outstanding vested options and
5,000 shares with respect to which Mr. Foley has the right to acquire
beneficial ownership by virtue of outstanding options that vest within
60 days of March 17, 2000.
29
<PAGE>
(6) Includes 42,728 shares with respect to which Adm. Fowler has the right to
acquire beneficial ownership by virtue of outstanding vested options and
5,000 shares with respect to which Adm. Fowler has the right to acquire
beneficial ownership by virtue of outstanding options that vest within
60 days of March 17, 2000.
(7) Includes 17,000 shares with respect to which Mr. Greaves has the right to
acquire beneficial ownership by virtue of outstanding vested options and
5,000 shares with respect to which Mr. Greaves has the right to acquire
beneficial ownership by virtue of outstanding options that vest within
60 days of March 17, 2000.
(8) Includes 42,728 shares with respect to which Mr. Hanselman has the right to
acquire beneficial ownership by virtue of outstanding vested options and
5,000 shares with respect to which Mr. Hanselman has the right to acquire
beneficial ownership by virtue of outstanding options that vest within
60 days of March 17, 2000.
(9) Includes 40,000 shares with respect to which Mr. Stegemeier has the right
to acquire beneficial ownership by virtue of outstanding vested options and
5,000 shares with respect to which Mr. Stegemeier has the right to acquire
beneficial ownership by virtue of outstanding options that vest within
60 days of March 17, 2000.
(10) Includes 42,728 shares with respect to which Mr. Troubh has the right to
acquire beneficial ownership by virtue of outstanding vested options and
5,000 shares with respect to which Mr. Troubh has the right to acquire
beneficial ownership by virtue of outstanding options that vest within
60 days of March 17, 2000.
(11) Includes 433,333 shares with respect to which Mr. Gellert has the right to
acquire beneficial ownership by virtue of outstanding vested options.
(12) Includes 157,917 shares with respect to which Mr. Costa has the right to
acquire beneficial ownership by virtue of outstanding vested options.
(13) Includes 44,000 shares with respect to which Ms. Coughlin has the right to
acquire beneficial ownership by virtue of outstanding vested options.
(14) Includes 66,667 shares with respect to which Ms. Tellez has the right to
acquire beneficial ownership by virtue of outstanding vested options.
(15) Includes 158,267 shares with respect to which Mr. Velasquez has the right
to acquire beneficial ownership by virtue of outstanding vested options.
(16) Includes an aggregate of 1,465,068 shares with respect to which all
current executive officers and directors as a group have the right to
acquire beneficial ownership by virtue of outstanding vested options, and
an aggregate of 78,333 shares with respect to which all current executive
officers and directors as a group have the right to acquire beneficial
ownership by virtue of outstanding options that vest within 60 days of
March 17, 2000.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Under the Exchange Act, the Company's directors, certain executive and other
officers, and any person holding more than ten percent of the Company's Class A
Common Stock are required to report their ownership and any changes in that
ownership to the Securities and Exchange Commission (the "SEC") and any exchange
or quotation system on which the Class A Common Stock is listed or quoted.
Specific due dates for these reports have been established and the Company is
required to report in this Proxy Statement any failure by directors, officers
and ten percent holders to file such reports on a timely basis. Based solely on
a review of the copies of reports furnished to the Company as filed with the
SEC, the Company believes that its executive officers and directors have
complied with the filing requirements applicable to them for the year ended
December 31, 1999.
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PROPOSAL 2--RATIFICATION OF SELECTION OF
INDEPENDENT PUBLIC ACCOUNTANTS
Upon recommendation of the Audit Committee, the Board of Directors of the
Company has selected Deloitte & Touche LLP to audit the consolidated financial
statements of the Company and its subsidiaries for the fiscal year ending
December 31, 2000. Deloitte & Touche LLP has served in this capacity since
June 3, 1994. Representatives of Deloitte & Touche LLP are expected to be
present at the Annual Meeting and will be available to respond to appropriate
questions of stockholders and to make a statement if they desire.
The affirmative vote of a majority of the votes cast on this proposal will
constitute ratification of the appointment of Deloitte & Touche LLP.
The Board of Directors is submitting the approval of Deloitte & Touche LLP
to stockholders as a matter of good corporate practice, although it is not
required to do so. Should the stockholders fail to provide such ratification,
the Board of Directors will reconsider its approval of Deloitte & Touche LLP as
the Company's independent public accountants for the year ended December 31,
2000. Even if the selection is ratified, the Board of Directors, in its
discretion, may direct the appointment of a new independent accounting firm at
any time during the fiscal year if the Board of Directors feels that such a
change would be in the best interests of the Company and its stockholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 2
TO RATIFY THE SELECTION OF DELOITTE & TOUCHE LLP AS THE COMPANY'S
INDEPENDENT PUBLIC ACCOUNTANTS.
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PROPOSAL 3--APPROVAL OF THE MATERIAL
TERMS OF A NEW EXECUTIVE OFFICER
INCENTIVE PLAN
GENERAL
On recommendation of the Compensation Committee, the Board of Directors is
proposing for stockholder approval certain terms of the Foundation Health
Systems, Inc. Executive Officer Incentive Plan (the "Incentive Plan").
Section 162(m) of the Code precludes a publicly held corporation from deducting,
for tax purposes, certain compensation in excess of $1,000,000 per year paid to
its chief executive officer and certain other officers. As applied to the
Company, Section 162(m) of the Code places this limit on the Company's Chief
Executive Officer and four highest compensated officers (other than the Chief
Executive Officer). The $1,000,000 limitation does not apply to certain
categories of stock options and other performance-based compensation grants
which meet the applicable statutory requirements, including obtaining
stockholder approval of material terms. Reference is made to ANNEX A to this
Proxy Statement for the complete text of the Incentive Plan, which is summarized
below.
DESCRIPTION OF THE MATERIAL TERMS OF THE INCENTIVE PLAN
The material terms of the Incentive Plan include (i) the executives eligible
to participate in the Incentive Plan, (ii) the incentive award opportunities
available under the Incentive Plan, (iii) the performance goals which apply to
each incentive award and the manner in which awards may be earned and (iv) the
amount of each incentive award calculated with respect to an objective formula
or standard.
ELIGIBLE INDIVIDUALS
All executives of the Company are eligible to be selected for participation
in the Incentive Plan for a specified period of time during which certain
performance goals are established (a "Performance Period"). Eligible executives
will be selected for participation for a Performance Period by the Compensation
Committee during the period beginning on or prior to such Performance Period and
ending not later than the earlier of (i) 90 days after the beginning of such
Performance Period and (ii) the date on which 25% of the Performance Period has
been completed (the "Applicable Period").
PERFORMANCE OBJECTIVES AND TARGET INCENTIVE LEVELS
Under the Incentive Plan, payment of incentive awards to participating
executives is subject to the attainment of specific performance goals
established by the Compensation Committee for each Performance Period, and other
terms and conditions that may be established by the Compensation Committee,
during the Applicable Period. In general, performance goals will be based on
objective corporate-wide or subsidiary, division or operating unit measures.
Upon attainment of the relevant performance goals, a participant will be
eligible to receive an incentive award, in cash or shares of Company stock,
determined pursuant to an objective formula or standard established at the same
time the performance goals were established. Such formula or standard may be
based on an executive's base salary at the time or immediately before the
performance goals for such Performance Period were established or on other fixed
and determinable measures. Under the terms of the Incentive Plan, the
Compensation Committee retains the absolute discretion to reduce, defer or
eliminate incentive awards to any participant.
The affirmative vote of a majority of the votes cast on this proposal will
constitute approval of the material terms of the new Executive Officer Incentive
Plan.
THE BOARD OF DIRECTORS
RECOMMENDS A VOTE FOR PROPOSAL 3
TO APPROVE THE MATERIAL TERMS OF A
NEW EXECUTIVE OFFICER INCENTIVE PLAN.
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PROPOSAL 4--STOCKHOLDER PROPOSAL
Alan G. Hevesi, Comptroller of the City of New York, on behalf of The New
York City Police Department Pension Fund, c/o Office of Comptroller of the City
of New York, 1 Centre Street, New York, NY 10007 (the "Fund"), the beneficial
holder of 13,954 shares of the Company's Class A Common Stock, has given notice
of the Fund's intention to introduce the following resolution (the "Stockholder
Proposal") at the Annual Meeting:
"BE IT RESOLVED, that the stockholders of Foundation Health Systems
request that the Board of Directors take the necessary steps to
declassify the Board of Directors and establish annual elections of
directors, whereby directors would be elected annually and not by
classes. This policy would take effect immediately, and be applicable to
the re-election of any incumbent director whose term, under the current
classified system, subsequently expires."
STOCKHOLDER'S STATEMENT IN SUPPORT OF THIS PROPOSAL
The fund has provided the following statement in support of this proposal:
"We believe that the ability to elect directors is the single most
important use of the shareholder franchise. Accordingly, directors
should be accountable to shareholders on an annual basis. The election
of directors by classes, for three-year terms, in our opinion, minimizes
accountability and precludes the full exercise of the rights of
shareholders to approve or disapprove annually the performance of a
director or directors.
In addition, since only one-third of the Board of Directors is elected
annually, we believe that classified boards could frustrate, to the
detriment of long-term shareholder interest, the efforts of a bidder to
acquire control or a challenger to engage successfully in a proxy
contest.
We urge your support for the proposal to repeal the classified board and
establish that all directors be elected annually."
BOARD OF DIRECTORS STATEMENT REGARDING THE PROPOSAL
The classification of the Board of Directors was initially approved by the
Company's stockholders in 1994 in connection with stockholder approval of the
merger transaction (the "1994 Consolidation") involving QualMed, Inc. and H.N.
Management Holdings, Inc. (both predecessors to the Company), and was approved
again in 1997 in connection with stockholder approval of the merger transaction
(the "1997 Consolidation") involving Foundation Health Corporation and Health
Systems International, Inc. (both predecessors to the Company). In each case,
the classification structure was included in the Certificate of Incorporation
adopted as part of the merger transaction; accordingly, the classification
system is currently required by the Company's Fourth Amended and Restated
Certificate of Incorporation (the "Certificate").
The Company's Board of Directors believes that there are good arguments both
for and against the board classification contained in the Certificate. The
arguments in favor of a classified board include the following:
- Classification provides continuity and stability of leadership;
- Classification allows the Company to implement long-term strategies and to
focus on long-term performance;
- Classification inhibits a substantial shareholder from changing abruptly
the entire Board of Directors without the approval, or at least the
cooperation, of the incumbent Board of Directors;
- Classification permits a more orderly process for directors to consider
any and all alternatives to maximize stockholder value, in the exercise of
their fiduciary responsibility; and
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- Classification inhibits unfriendly take-over attempts.
On the other hand, the arguments against a classified board include the
following:
- Classification protects the incumbency of current directors and,
therefore, management; and
- A classified board is less accountable to stockholders because
stockholders are permitted to express their views on a particular director
only once every three years.
Under the corporate law of the State of Delaware, the state in which the
Company is incorporated, the action recommended in the Stockholder Proposal
could be taken only if: (i) the Board of Directors recommended an amendment to
the Company's Certificate and directed that the amendment be submitted to a vote
of the Company's stockholders; and (ii) the amendment is approved at a future
meeting of stockholders. Therefore, a vote in favor of this Stockholder Proposal
is only an advisory recommendation to the Board of Directors that it take steps
to initiate such an amendment.
Also, pursuant to the provisions of the Certificate, any such amendment
would require the affirmative vote of at least 80 percent of the outstanding
shares of Common Stock of the Company. This 80 percent voting requirement was
approved by the stockholders of the Company in 1994 upon approval of the 1994
Consolidation and again in 1997 upon approval of the 1997 Consolidation. The
Board of Directors believes that this 80 percent voting requirement will be
difficult to achieve.
The Board of Directors is not making a recommendation on how stockholders
should vote on this Stockholder Proposal, but instead wants to receive a clear
indication of how the Company's stockholders would like it to proceed on this
issue. If you do not vote "FOR" or "AGAINST" this item, your vote will be
counted as an abstention.
THE BOARD OF DIRECTORS IS NOT MAKING A
RECOMMENDATION TO VOTE
EITHER FOR OR AGAINST
THE STOCKHOLDER PROPOSAL.
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REQUIREMENTS AND PROCEDURES FOR SUBMISSION OF PROXY PROPOSALS AND NOMINATIONS OF
DIRECTORS BY STOCKHOLDERS
NOMINATIONS FOR THE BOARD OF DIRECTORS. The Company expects to hold its
2001 Annual Meeting of Stockholders in May of 2001, although the Company retains
the right to change this date, as it may determine. The By-Laws provide that
written notice of proposed stockholder nominations for the election of directors
at the 2001 Annual Meeting of Stockholders must be received by the Secretary of
the Company not less than sixty days nor more than ninety days prior to the
meeting; provided that, in the event that less than 40 calendar days' notice or
prior public disclosure of the date of the meeting is given or made to the
stockholders, notice must be received not later than the close of business on
the tenth calendar day following the date on which the notice of the date of the
meeting was mailed or public disclosure was made. Notice to the Company from a
stockholder who proposes to nominate a person for election as a director must
satisfy the requirements of the Securities and Exchange Commission (the "SEC")
and the By-Laws. Stockholders wishing to nominate persons should contact the
Company's Secretary at 21650 Oxnard Street, Woodland Hills, California 91367.
PROPOSALS. Any stockholder who intends to present a proposal to be included
in the Company's proxy materials to be considered for action at the 2001 Annual
Meeting of Stockholders must satisfy the requirements of the SEC and the
proposal must be received by the Secretary of the Company on or before
December 1, 2000 for review and consideration for inclusion in the Company's
proxy statement and proxy card relating to that meeting.
The Chairman of the Annual Meeting may decline to allow the transaction of
any business or the consideration of any nomination which was not properly
presented in accordance with these requirements. The requirements with respect
to the nomination of director candidates do not affect the deadline for
submitting stockholder proposals for inclusion in the proxy statement, nor do
they apply to questions a stockholder may wish to ask at a meeting.
UPON WRITTEN REQUEST BY ANY STOCKHOLDER, THE COMPANY WILL PROVIDE WITHOUT
CHARGE A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE COMPANY'S MOST
RECENT FISCAL YEAR, INCLUDING THE FINANCIAL STATEMENTS AND THE FINANCIAL
STATEMENT SCHEDULES REQUIRED TO BE FILED WITH THE SEC. SUCH WRITTEN REQUESTS
SHOULD BE DIRECTED TO DAVID OLSON, SENIOR VICE PRESIDENT OF INVESTOR RELATIONS,
21650 OXNARD STREET, WOODLAND HILLS, CA 91367.
OTHER MATTERS
The Board of Directors knows of no other business that will be presented for
consideration at the Annual Meeting. If other matters are properly brought
before the meeting, however, it is the intention of the persons named in the
accompanying proxy to vote the shares represented thereby on such matters in
accordance with their best judgment.
By Order of the Board of Directors,
/s/ B. Curtis Westen
B. Curtis Westen, Esq.
SENIOR VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY
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ANNEX A
FOUNDATION HEALTH SYSTEMS, INC.
EXECUTIVE OFFICER INCENTIVE PLAN
I. PURPOSE
The purposes of the Foundation Health Systems, Inc. Executive Officer
Incentive Plan (the "Plan") are to retain and motivate the Executive Officers of
Foundation Health Systems, Inc. ("the Company") who have been designated by the
Committee to be Participants for a Performance Period by providing them with the
opportunity to earn incentive payments based upon the extent to which specified
performance goals have been achieved or exceeded for the Performance Period. It
is intended that all amounts payable to Participants who are "covered employees"
within the meaning of Section 162(m) of the Code will constitute "qualified
performance-based compensation" within the meaning of U.S. Treasury regulations
promulgated thereunder, and the Plan and the terms of any awards hereunder shall
be so interpreted and construed to the maximum extent possible.
II. DEFINITIONS
For purposes of the Plan, the following terms shall have the following
meanings:
1. "Annual Base Salary" shall mean for any Executive Officer an amount
equal to the rate of annual base salary in effect or approved by the
Committee or other authorized person at the time or immediately before
performance goals are established for a Performance Period, including
any base salary that otherwise would be payable to the Executive Officer
during the Performance Period but for his or her election to defer
receipt thereof. Notwithstanding the previous sentence, the Committee,
in its sole discretion, may provide at the time it selects an Executive
Officer to be a Participant that such Participant's Annual Base Salary
shall have a different meaning, provided that the dollar amount of such
Annual Base Salary is fixed at the time the applicable performance goals
are established.
2. "Applicable Period" shall mean, with respect to any Performance Period,
a period commencing on or before the first day of the Performance Period
and ending not later than the earlier of (i) 90 days after the
commencement of the Performance Period and (ii) the date on which
twenty-five percent (25%) of the Performance Period has been completed.
Any action required to be taken within an Applicable Period may be taken
at a later date if permissable under Section 162(m) of the Code or
regulations promulgated thereunder, as they may be amended from time to
time.
3. "Board" shall mean the Board of Directors of the Company.
4. "Cause" shall mean "cause" as defined in any employment agreement
between an Executive Officer and the Company, or if not defined in such
agreement, or if there is no agreement, "Cause" shall include, without
limitation, (a) an act of dishonesty causing harm to the Company, (b)
the knowing disclosure of confidential information relating to the
Company's business, (c) habitual drunkenness or narcotic drug addiction,
(d) conviction of a felony, (e) willful refusal to perform or gross
neglect of the duties assigned to the Participant, (f) the Participant's
willful breach of any law that, directly or indirectly, affects the
Company, (g) the Participant's material breach of his or her duties or
responsibilities following a Change of Control that do not differ in any
material respect from the Participant's duties and responsibilities
during the 90-day period immediately prior to such Change of Control
(other than as a result of incapacity due to physical or mental illness)
which is demonstrably willful and deliberate on the Participant's part,
which is committed in bad faith or without reasonable belief that such
breach is in the best interests of the Company and which is not remedied
in a reasonable period of time after receipt of written notice from the
Company specifying such breach.
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5. "Change of Control" shall mean any of the following: (a) any person (as
such term is defined under Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")), corporation or other
entity (other than the Company or any employee benefit plan sponsored by
the Company or any of its subsidiaries) is or becomes the beneficial
owner (as such term is defined in Rule 13d-3 under the Exchange Act) of
securities of the Company representing twenty percent (20%) or more of
the combined voting power of the outstanding securities of the Company
which ordinarily (and apart from rights accruing under special
circumstances) have the right to vote in the election of directors
(calculated as provided in paragraph (d) of such Rule 13d-3 in the case
of rights to acquire the Company's securities)(the "Securities"); (b) as
a result of a tender offer, merger, sale of assets or other major
transaction, the persons who are directors of the Company immediately
prior to such transaction cease to constitute a majority of the Board of
the Company (or any successor corporations) immediately after such
transaction; (c) the Company is merged or consolidated with any other
person, firm, corporation or other entity and, as a result, the
shareholders of the Company, as determined immediately before such
transaction, own less than eighty percent (80%) of the outstanding
Securities of the surviving or resulting entity immediately after such
transaction; (d) a tender offer or exchange offer is made and
consummated for the ownership of twenty percent (20%) or more of the
outstanding Securities of the Company; (e) the Company transfers
substantially all its assets to another person, firm, corporation or
other entity that is not a wholly owned subsidiary of the Company; or
(f) the Company enters into a management agreement with another person,
firm, corporation or other entity that is not a wholly owned subsidiary
of the Company and such management agreement extends hiring and firing
authority over Employee to an individual or organization other than the
Company.
6. "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
7. "Committee" shall mean the Compensation and Stock Option Committee of
the Board or a subcommittee thereof that is comprised solely of at least
two non-employee directors (each of whom is intended to qualify as an
"outside director" within the meaning of Section 162(m) of the Code).
8. "Company" shall mean Foundation Health Systems, Inc., a corporation
organized under the laws of the State of Delaware, and any successor
thereto.
9. "Disability" shall mean "disability" as defined in any employment
agreement between the Participant and the Company or any of its
subsidiaries) or, if not defined therein or if there is no such
agreement, as defined in the Company's long-term disability plan.
10. "Executive Officer" shall have the meaning set forth in Rule 3b-7
promulgated under the Securities Exchange Act of 1934, in each case as
amended from time to time.
11. "Individual Award Opportunity" shall mean the potential of a Participant
to receive an incentive payment if the performance goals for a
Performance Period shall have been satisfied. An Individual Award
Opportunity may be expressed in U.S. dollars or pursuant to a formula
that is consistent with the provisions of the Plan.
12. "Participant" shall mean an Executive Officer of the Company who is
designated by the Committee to participate in the Plan for a Performance
Period.
13. "Performance Period" shall mean any period commencing on or after
January 1, 2000 for which performance goals are established pursuant to
Article V. A Performance Period may be coincident with one or more fiscal
years of the Company or a portion of any fiscal year of the Company.
14. "Plan" shall mean the Foundation Health Systems, Inc. Executive Officer
Incentive Plan as set forth herein, as it may be amended from time to
time.
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III. ADMINISTRATION
1. GENERAL. The Plan shall be administered by the Committee, which shall
have the full power and authority to interpret, construe and administer
the Plan and any Individual Award Opportunity granted hereunder
(including reconciling any inconsistencies, correcting any defaults and
addressing any omissions). The Committee's interpretation, construction
and administration of the Plan and all its determinations hereunder shall
be final, conclusive and binding on all persons for all purposes. No
member of the Committee shall be liable to any person for any action
taken or omitted in connection with the interpretation, construction or
administration of the Plan or any Incentive Award Opportunity unless such
action or inaction is attributable to his or her own willful misconduct
or lack of good faith.
2. POWERS AND RESPONSIBILITIES. The Committee shall have the following
discretionary powers, rights and responsibilities in addition to those
described in Section 1 of this Article III:
(a) to designate within the Applicable Period the Participants for a
Performance Period;
(b) to establish within the Applicable Period the performance goals and
other terms and conditions that are to apply to each Participant's
Individual Award Opportunity, including the extent to which any
incentive payment shall be made to a Participant in the event of
(A) the Participant's termination of employment due to death,
Disability, or other termination of employment with the Company (or
any of its subsidiaries), with or without Cause, or (B) a Change of
Control;
(c) to determine in writing prior to the payment under any Incentive
Award Opportunity that the performance goals for a Performance Period
and other material terms applicable to the Incentive Award
Opportunities have been satisfied;
(d) to decide whether, and under what circumstances and subject to what
terms, Incentive Award Opportunities are to be paid on a deferred
basis, including whether such a deferred payment shall be made solely
at the Committee's discretion or whether a Participant may elect
deferred payment; and
(e) to adopt, revise, suspend, waive or repeal, when and as appropriate,
in its sole and absolute discretion, such administrative rules,
guidelines and procedures for the Plan as it deems necessary or
advisable to implement the terms and conditions of the Plan.
IV. OTHER PLAN PARTICIPATION
Notwithstanding any provision in any other plan of incentive compensation of
the Company or any of its subsidiaries, an Executive Officer who is a
Participant in the Plan for any Performance Period shall not participate in any
such other plan during such Performance Period.
V. PERFORMANCE GOALS
1. ESTABLISHING PERFORMANCE GOALS. The Committee shall establish within
the Applicable Period of each Performance Period one or more objective
performance goals for each Participant or for any group of Participants
(or both), provided that the outcome of each goal is substantially
uncertain at the time the Committee establishes such goal. Performance
goals shall be based exclusively on one or more of the following
objective corporate-wide or subsidiary, division or operating unit
measures: earnings per share; share price; earnings before interest,
taxes, depreciation or amortization (or any combination thereof); direct
margin; expense reduction; customer satisfaction survey results; employee
satisfaction survey results; member retention; net income; operating
income; revenues; profit margin; cash flow(s); financial return ratios;
return on equity; and
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strategic business criteria, consisting of one or more objectives based
on achieving specified revenue, market penetration, or geographic
business expansion goals, or cost targets, or goals relating to
acquisitions or divestitures. Each such goal may be expressed on an
absolute or relative basis and may include comparisons based on current
internal targets, the past performance of the Company (including the
performance of one or more subsidiaries, divisions, or operating units)
or the past or current performance of other companies (or a combination
of such past and current performance). In the case of earnings-based
measures, performance goals may include comparisons relating to capital
(including, but not limited to, the cost of capital), shareholders'
equity, shares outstanding, assets or net assets, or any combination
thereof. Performance goals shall be subject to such other special rules
and conditions as the Committee may establish at any time within the
Applicable Period.
2. IMPACT OF EXTRAORDINARY ITEMS OR CHANGES IN ACCOUNTING. The measures
utilized in establishing performance goals under the Plan for any given
Performance Period shall be determined in accordance with generally
accepted accounting principles ("GAAP") and in a manner consistent with
the methods used in the Company's audited financial statements, without
regard to (i) extraordinary items as determined by the Company's
independent public accountants in accordance with GAAP or (ii) changes in
accounting, unless, in each case, the Committee decides otherwise within
the Applicable Period.
VI. INCENTIVE AWARD OPPORTUNITIES
1. TERMS. At the time performance goals are established for a Performance
Period, the Committee also shall establish an Individual Award
Opportunity for each Participant or group of Participants, which shall be
based on the achievement of one or more specified targets of performance
goals. The targets shall be expressed in terms of objective formula or
standard which may be based upon the Participant's Annual Base Salary or
a multiple thereof. In all cases the Committee shall have the sole and
absolute discretion to reduce the amount of any payment under any
Incentive Award Opportunity that would otherwise be made to any
Participant or to decide that no payment shall be made.
2. INCENTIVE PAYMENTS. Payments under Incentive Award Opportunities shall
be in cash or in shares of Company stock and shall be made at the time
determined by the Committee after the end of the Performance Period for
which the Incentive Awards are payable, except that no such payment shall
be made unless and until the Committee, based on the Company's audited
financial results for such Performance Period (as prepared and reviewed
by the Company's independent public accountants), has certified in
writing the extent to which the applicable performance goals for such
Performance Period have been satisfied.
VII. GENERAL PROVISIONS
1. PLAN AMENDMENT OR TERMINATION. The Committee at any time may amend or
terminate the Plan, subject to any shareholder approval required by law,
provided that, without the Participant's written consent, no such
amendment or termination shall adversely affect the right of any
Participant to receive a payment under any Incentive Award Opportunity
previously awarded to such Participant.
2. APPLICABLE LAW. All issues arising under the Plan shall be interpreted
and construed in accordance with the laws of the State of Delaware,
without regard to principles of conflicts of law.
3. TAX WITHHOLDING. The Company shall have the right to withhold any and
all federal, state and local taxes that the Company deems may be required
to be withheld in respect of any payment under any Incentive Award
Opportunity.
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4. NO EMPLOYMENT RIGHT CONFERRED. Participation in the Plan shall not
confer on any Participant the right to remain employed by the Company or
any of its subsidiaries, and the Company and its subsidiaries
specifically reserve the right to terminate any Participant's employment
at any time with or without cause or notice.
5. OTHER PLANS. Payments under Incentive Award Opportunities shall not be
treated as compensation for purposes of any other compensation or benefit
plan, program or arrangement of the Company or any of its subsidiaries,
unless either (i) such other plan provides that compensation such as
payments made pursuant to Incentive Award Opportunities is to be
considered as compensation thereunder or (ii) the Board or the Committee
so determines in writing. Neither the adoption of the Plan nor the
submission of the Plan to the Company's stockholders for their approval
shall be construed as limiting the power of the Board or the Committee to
adopt such other incentive arrangements as it may otherwise deem
appropriate.
6. COSTS AND EXPENSES. All administrative costs and expenses of the Plan
and the Incentive Award Opportunities granted hereunder shall be borne by
the Company.
7. NON-TRANSFERABILITY OF RIGHTS. Except as and to the extent required by
law, a Participant's rights under the Plan may not be assigned or
transferred in whole or in part either directly or by operation of law or
otherwise including, but not limited to, by way of execution, levy,
garnishment, attachment, pledge, bankruptcy or in any other manner, and
no such right of the Participant shall be subject to any obligation or
liability of the Participant other than any obligation or liability owed
by the Participant to the Company or any of its subsidiaries.
8. BINDING EFFECT. The Plan shall be binding upon the Company and its
successors and assigns and the Participants and their beneficiaries,
personal representatives and heirs. If the Company becomes a party to any
merger, consolidation or reorganization, then the Plan shall remain in
full force and effect as an obligation of the Company or its successors
in interest, unless the Plan is amended or terminated pursuant to Section
1 of Article VII.
9. EFFECTIVE DATE. The Plan is effective for Performance Periods
commencing on or after January 1, 2000, subject to stockholder approval
of the Plan. If approved, the Plan shall remain in effect until December
31, 2005, unless terminated earlier.
A5
<PAGE>
PROXY PROXY
FOUNDATION HEALTH SYSTEMS, INC.
21650 OXNARD STREET
WOODLAND HILLS, CALIFORNIA 91367
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND MANAGEMENT OF
FOUNDATION HEALTH SYSTEMS, INC.
The undersigned does hereby appoint Jay M. Gellert and B. Curtis Westen as
Proxies, each with the power to appoint his substitute, and hereby authorizes
them to represent and to vote, as designated below, all the shares of Class A
Common Stock of Foundation Health Systems, Inc. (the "Company") held of record
by the undersigned on March 17, 2000 at the annual meeting of stockholders (the
"Annual Meeting") to be held on May 4, 2000 or any adjournment or postponement
thereof.
If no direction is made, this Proxy will be voted FOR Proposal 1, Proposal
2 and Proposal 3, ABSTAIN for Proposal 4 and in the direction of the Proxies as
to any other matter that may properly come before the Annual Meeting.
PLEASE MARK, SIGN, DATE AND MAIL THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
(CONTINUED AND TO BE SIGNED ON REVERSE)
- --------------------------------------------------------------------------------
ON THE REVERSE SIDE OF THIS CARD ARE INSTRUCTIONS ON HOW TO VOTE YOUR SHARES FOR
THE ELECTION OF DIRECTORS AND ALL OTHER PROPOSALS OVER THE INTERNET. PLEASE
CONSIDER VOTING OVER THE INTERNET, WHICH IS EASY AND CONVENIENT - YOUR VOTE IS
RECORDED AS IF YOU MAILED IN YOUR PROXY CARD.
THANK YOU FOR YOUR ATTENTION TO THESE MATTERS.
5123-FOUNDATION HEALTH SYSTEMS, INC.
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. /X/
<TABLE>
<S><C>
For Withhold For All For Against Abstain
1. ELECTION OF DIRECTORS - All All Except 2. To ratify the selection of Deloitte / / / / / /
NOMINEES: 01-Gov. George / / / / / / & Touche LLP as the Company's independent
Deukmejian and 02-Jay M. public accountants.
Gellert
3. To approve the material terms of a new For Against Abstain
Executive Officer Incentive Plan. / / / / / /
------------------------------------------ 4. To act upon the stockholder proposal For Against Abstain
(EXCEPT NOMINEE(S) AS WRITTEN ABOVE) that may be introduced at the Annual / / / / / /
Meeting as set forth in the Proxy
Statement distributed in connection
with the Annual Meeting.
5. To authorize the proxies to vote in their For Against Abstain
discretion upon such other matters as may / / / / / /
properly come before the Annual Meeting.
The undersigned acknowledges receipt of the Notice of Annual Meeting
of Stockholders to be held on May 4, 2000 and the related Proxy
Statement. This Proxy, when properly executed, will be voted in the
manner directed herein by the undersigned stockholder.
Dated: , 2000
------------------------------
Signature(s):
---------------------------------------------------------
----------------------------------------------------------------------
Please sign exactly as name appears hereon. When shares are held
jointly, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If
a corporation, please sign in full corporate name by the President or
other authorized officer. If a partnership, please sign in partnership
name by authorized person.
</TABLE>
5123-FOUNDATION HEALTH SYSTEMS, INC.
- --------------------------------------------------------------------------------
CONTROL NUMBER DETACH PROXY CARD HERE
NOW YOU CAN VOTE YOUR SHARES VIA THE INTERNET!
QUICK * EASY * IMMEDIATE * AVAILABLE 24 HOURS A DAY * 7 DAYS A WEEK
---------------------------------------------------
TO VOTE VIA THE INTERNET Go to the following website:
www.harrisbank.com/wproxy
Enter the information requested on your computer
screen, including your 6-digit CONTROL NUMBER
located above.
Follow the simple instructions on the screen.
---------------------------------------------------
If you vote using the Internet, DO NOT mail back the proxy card unless you wish
to change your vote.
NOTE: INTERNET VOTING IS ONLY AVAILABLE UNTIL 5:00 P.M. (CDT) ON
TUESDAY, MAY 2, 2000.
THANK YOU FOR VOTING!
