<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-12718
------------------------
FOUNDATION HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-4288333
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
21650 OXNARD STREET,
WOODLAND HILLS, CA 91367
(Address of principal executive offices) (Zip Code)
</TABLE>
(818) 676-6978
Registrant's telephone number, including area code
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
The number of shares outstanding of the registrant's Class A Common Stock as
of August 10, 2000 was 122,411,685 (excluding 3,194,374 shares held as treasury
stock) and no shares of Class B Common Stock were outstanding as of such date.
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<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1--Financial Statements
Condensed Consolidated Balance Sheets as of June 30,
2000 and December 31, 1999............................. 3
Condensed Consolidated Statements of Operations for the
Second Quarter Ended June 30, 2000 and 1999............ 4
Condensed Consolidated Statements of Operations for the
Six Months Ended June 30, 2000 and 1999................ 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999................ 6
Notes to Condensed Consolidated Financial Statements.... 7
Item 2--Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 15
Item 3--Quantitative and Qualitative Disclosures About
Market Risk............................................... 21
PART II--OTHER INFORMATION
Item 1--Legal Proceedings................................... 23
Item 2--Changes in Securities............................... 25
Item 3--Defaults Upon Senior Securities..................... 26
Item 4--Submission of Matters to a Vote of Security
Holders................................................... 27
Item 5--Other Information................................... 28
Item 6--Exhibits and Reports on Form 8-K.................... 30
Signatures.................................................. 35
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOUNDATION HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 888,637 $1,010,539
Investments--available for sale........................... 514,685 456,603
Premiums receivable, net.................................. 144,586 149,992
Amounts receivable under government contracts............. 388,403 290,329
Deferred taxes............................................ 166,314 209,037
Reinsurance and other receivables......................... 139,915 153,427
Other assets.............................................. 69,780 77,866
---------- ----------
Total current assets.................................... 2,312,320 2,347,793
Property and equipment, net................................. 258,860 280,729
Goodwill and other intangible assets, net................... 882,006 909,586
Other noncurrent assets..................................... 97,071 158,373
---------- ----------
Total Assets............................................ $3,550,257 $3,696,481
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Reserves for claims and other settlements................. $1,083,466 $1,138,801
Unearned premiums......................................... 188,261 224,381
Notes payable and capital leases.......................... 711 1,256
Amounts payable under government contracts................ 44,115 43,843
Accounts payable and other liabilities.................... 238,752 322,048
---------- ----------
Total current liabilities............................... 1,555,305 1,730,329
Notes payable and capital leases............................ 992,992 1,039,352
Deferred taxes.............................................. 8,934 5,624
Other noncurrent liabilities................................ 28,306 29,977
---------- ----------
Total Liabilities....................................... 2,585,537 2,805,282
---------- ----------
Stockholders' Equity:
Common stock and additional paid-in capital............... 644,042 643,498
Treasury Class A common stock, at cost.................... (95,831) (95,831)
Accumulated other comprehensive loss...................... (3,842) (4,069)
Retained earnings......................................... 420,351 347,601
---------- ----------
Total Stockholders' Equity.............................. 964,720 891,199
---------- ----------
Total Liabilities and Stockholders' Equity.............. $3,550,257 $3,696,481
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SECOND QUARTER ENDED
JUNE 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
REVENUES
Health plan premiums...................................... $1,795,591 $1,743,698
Government contracts/Specialty services................... 408,554 365,797
Investment and other income............................... 25,455 19,494
Net loss on sale of businesses and buildings.............. -- (3,328)
---------- ----------
Total revenues.......................................... 2,229,600 2,125,661
---------- ----------
EXPENSES
Health plan services...................................... 1,530,497 1,474,360
Government contracts/Specialty services................... 272,694 241,840
Selling, general and administrative....................... 314,885 314,674
Depreciation.............................................. 17,072 17,037
Amortization.............................................. 9,723 10,544
Interest.................................................. 21,933 20,657
---------- ----------
Total expenses.......................................... 2,166,804 2,079,112
---------- ----------
Income before income tax provision.......................... 62,796 46,549
Income tax provision........................................ 24,101 18,580
---------- ----------
Net income.................................................. $ 38,695 $ 27,969
========== ==========
Basic and diluted earnings per share........................ $ 0.32 $ 0.23
========== ==========
Weighted average shares outstanding:
Basic....................................................... 122,441 122,279
Diluted..................................................... 122,712 123,161
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
REVENUES
Health plan premiums...................................... $3,583,567 $3,516,078
Government contracts/Specialty services................... 797,534 733,104
Investment and other income............................... 47,834 38,151
Net gain on sale of businesses and buildings.............. -- 57,270
---------- ----------
Total revenues.......................................... 4,428,935 4,344,603
---------- ----------
EXPENSES
Health plan services...................................... 3,053,015 2,977,062
Government contracts/Specialty services................... 527,357 480,894
Selling, general and administrative....................... 633,982 641,361
Depreciation.............................................. 33,952 34,776
Amortization.............................................. 19,304 21,528
Interest.................................................. 43,267 42,595
Restructuring and other costs............................. -- 21,059
---------- ----------
Total expenses.......................................... 4,310,877 4,219,275
---------- ----------
Income before income tax provision and cumulative effect of
a change in accounting principle.......................... 118,058 125,328
Income tax provision........................................ 45,308 50,021
---------- ----------
Income before cumulative effect of a change in accounting
principle................................................. 72,750 75,307
Cumulative effect of a change in accounting principle, net
of tax.................................................... -- (5,417)
---------- ----------
Net income.................................................. $ 72,750 $ 69,890
========== ==========
Basic and diluted earnings per share:
Income before cumulative effect of a change in accounting
principle................................................. $ 0.59 $ 0.62
Cumulative effect of a change in accounting principle....... -- (0.05)
---------- ----------
Net income.................................................. $ 0.59 $ 0.57
========== ==========
Weighted average shares outstanding:
Basic....................................................... 122,414 122,257
Diluted..................................................... 122,530 122,296
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
2000 1999
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 72,750 $ 69,890
Adjustments to reconcile net income to net cash used in
operating activities:
Amortization and depreciation............................. 53,256 56,304
Net gain on sale of businesses and buildings.............. -- (57,270)
Cumulative effect of a change in accounting principle..... -- 5,417
Restructuring and other costs............................. -- 21,059
Other changes............................................. 6,240 2,263
Changes in assets and liabilities, net of effect of
dispositions:
Premiums receivable..................................... 5,406 34,681
Unearned premiums....................................... (36,120) (233,570)
Other assets............................................ 43,004 67,606
Amounts receivable/payable under government contracts... (97,802) 15,487
Reserves for claims and other settlements............... (55,335) 22,429
Accounts payable and other liabilities.................. (56,646) (151,277)
---------- ---------
Net cash flows used in operating activities................. (65,247) (146,981)
---------- ---------
INVESTING ACTIVITIES:
Sales or maturities of investments.......................... 138,699 264,781
Purchases of investments.................................... (120,112) (320,612)
Net purchases of property and equipment..................... (13,457) (13,591)
Net proceeds from the sale of businesses.................... -- 83,433
Other....................................................... (15,432) 8,323
---------- ---------
Net cash flows (used in) provided by investing activities... (10,302) 22,334
---------- ---------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock
purchases................................................. 545 850
Proceeds from issuance of notes payable and other financing
arrangements.............................................. 60,029 20,000
Repayment of debt and other noncurrent liabilities.......... (106,927) (184,313)
---------- ---------
Net cash flows used in financing activities................. (46,353) (163,463)
---------- ---------
Net decrease in cash and cash equivalents................... (121,902) (288,110)
Cash and cash equivalents, beginning of period.............. 1,010,539 763,865
---------- ---------
Cash and cash equivalents, end of period.................... $ 888,637 $ 475,755
========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Following the rules and regulations of the Securities and Exchange
Commission ("SEC"), the Company has omitted footnote disclosures that would
substantially duplicate the disclosures contained in the Company's annual
audited financial statements. The following unaudited condensed consolidated
financial statements should be read together with the consolidated financial
statements and the notes included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1999.
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments, consisting solely of normal recurring adjustments,
needed to present fairly the financial results of operations and cash flows for
the interim periods presented in accordance with generally accepted accounting
principles in the United States of America. Results of operations for the
interim periods are not necessarily indicative of results for a full year.
Certain 1999 amounts have been reclassified to conform to the 2000
presentation. The reclassifications have no effect on net earnings or
stockholders' equity as previously reported.
2. RESTRUCTURING AND OTHER COSTS
The principal components of restructuring and other costs for the six months
ended June 30 are as follows (amounts in millions):
<TABLE>
<CAPTION>
2000 1999
--------- --------
<S> <C> <C>
Severance and benefit related costs......................... $ -- $18.5
Real estate lease termination costs......................... -- 0.8
Other costs................................................. -- 1.8
--------- -----
Total..................................................... $ -- $21.1
========= =====
</TABLE>
1999 CHARGES
The following tables summarize the 1999 charges by quarter and by type
(amounts in millions):
<TABLE>
<CAPTION>
1999 ACTIVITY
1999 NET ------------------- BALANCE AT
1999 MODIFICATIONS 1999 CASH DECEMBER 31,
CHARGES TO ESTIMATE CHARGES PAYMENTS NON-CASH 1999
-------- ------------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Severance and benefit related
costs.......................... $18.5 $(1.3) $17.2 $ (8.6) $ -- $8.6
Asset impairment costs........... 6.2 -- 6.2 -- (6.2) --
Real estate lease termination
costs.......................... 0.8 -- 0.8 (0.8) -- --
Other costs...................... 1.8 (0.1) 1.7 (1.4) -- 0.3
----- ----- ----- ------ ----- ----
Total............................ $27.3 $(1.4) $25.9 $(10.8) $(6.2) $8.9
===== ===== ===== ====== ===== ====
First Quarter 1999 Charge........ $21.1 $(1.4) $19.7 $(10.8) $ -- $8.9
Fourth Quarter 1999 Charge....... 6.2 -- 6.2 -- (6.2) --
----- ----- ----- ------ ----- ----
Total............................ $27.3 $(1.4) $25.9 $(10.8) $(6.2) $8.9
===== ===== ===== ====== ===== ====
</TABLE>
7
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. RESTRUCTURING AND OTHER COSTS (CONTINUED)
<TABLE>
<CAPTION>
2000
ACTIVITY
BALANCE AT -------- BALANCE AT EXPECTED
DECEMBER 31, CASH JUNE 30, FUTURE CASH
1999 PAYMENTS 2000 OUTLAYS
------------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Severance and benefit related costs.............. $8.6 $(5.6) $3.0 $3.0
Asset impairment costs........................... -- -- -- --
Real estate lease termination costs.............. -- -- -- --
Other costs...................................... 0.3 (0.3) -- --
---- ----- ---- ----
Total............................................ $8.9 $(5.9) $3.0 $3.0
==== ===== ==== ====
First Quarter 1999 Charge........................ $8.9 $(5.9) $3.0 $3.0
Fourth Quarter 1999 Charge....................... -- -- -- --
---- ----- ---- ----
Total............................................ $8.9 $(5.9) $3.0 $3.0
==== ===== ==== ====
</TABLE>
During the fourth quarter of 1998, the Company initiated a formal plan to
dispose of certain health plans of the Company's then Central Division included
in the Company's Health Plan Services segment in accordance with its anticipated
divestitures program. In this connection, the Company announced its plan to
close the Colorado regional processing center, terminate employees and transfer
these operations to the Company's other administrative facilities. In addition,
the Company announced its plans to consolidate certain administrative functions
in its Oregon and Washington health plan operations. As a result of these plans,
during the first and fourth quarters ended March 31, 1999 and December 31, 1999,
the Company recorded pretax charges for restructuring and other charges of
$21.1 million (the "1999 Charges") and asset impairment charges of
$6.2 million, respectively.
SEVERANCE AND BENEFIT RELATED COSTS--The 1999 Charges included
$18.5 million for severance and benefit costs related to executives and
operations employees at the Colorado regional processing center and operations
employees at the Oregon and Washington health plans. The operations functions
include premium accounting, claims, medical management, customer service, sales
and other related departments. The 1999 Charges included the termination of a
total of 773 employees. As of June 30, 2000, 742 employees had been terminated,
$14.2 million had been recorded as severance under this plan and $3.0 million is
expected to require future cash outlays. Termination of the remaining 31
employees is expected to be completed during the third quarter of 2000.
Modifications to the initial estimate of $1.3 million were recorded during the
fourth quarter of 1999. No further adjustments to the original estimates have
been recorded as of June 30, 2000.
ASSET IMPAIRMENT COSTS--During the fourth quarter ended December 31, 1999,
the Company recorded asset impairment costs totaling $6.2 million related to
impairment of certain long-lived assets held for disposal. These charges
included a further adjustment of $4.7 million to adjust the carrying value of
the Company's Ohio, West Virginia and West Pennsylvania operations to fair value
and an adjustment of $1.5 million to adjust the carrying value of its subacute
care management operations. The revenue and pretax loss attributable to these
operations were $32 million and $0.3 million, respectively, for the six months
ended June 30, 2000. The carrying value of these assets as of June 30, 2000 was
$16.3 million.
8
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. RESTRUCTURING AND OTHER COSTS (CONTINUED)
REAL ESTATE LEASE TERMINATION AND OTHER COSTS--The 1999 Charges included
$2.6 million to terminate real estate obligations and other costs to close the
Colorado regional processing center.
1998 CHARGES
In connection with the Company's 1998 restructuring plans, severance, asset
impairment and other costs totaling $240.1 million were recorded during the year
ended December 31, 1998. The 1998 restructuring plans were completed at the end
of 1999.
On July 19, 1998, FPA Medical Management, Inc. ("FPA") filed for bankruptcy
protection under Chapter 11 of the Bankruptcy Code. The FPA bankruptcy and
related events and circumstances caused management to re-evaluate the decision
to continue to operate 14 facilities previously leased to FPA and management
determined to sell the properties. As part of the 1998 Charges, the Company
recorded $84.1 million of asset impairment costs related to the 14 properties
and other costs related to FPA. As of June 30, 2000, 12 of these properties have
been sold. The remaining properties are expected to be sold during 2000. The
carrying value of the assets held for disposal totaled $9.9 million at June 30,
2000. The results of operations attributable to such real estate assets were
immaterial for the six months ended June 30, 2000 and 1999.
As part of the 1998 restructuring plans, the Company initiated a formal plan
to dispose of certain health plans of the Company's then Central Division
included in the Company's Health Plan Services segment in accordance with its
anticipated divestitures program. The Company sold and/or transitioned to third
parties a majority of the business of these health plans in 1999. In 1998, the
Company recorded asset impairment charges of $112.4 million related to these
plans. As discussed under "1999 Charges," further adjustments to carrying value
of $4.7 million were recorded in 1999. Revenues and pretax losses attributable
to the remaining business of these plans were $8.2 million and $0.3 million,
respectively, for the six months ended June 30, 2000. The carrying value of
these assets as of June 30, 2000 was $9.1 million.
3. COMPREHENSIVE INCOME
Comprehensive income for the second quarter and six months ended June 30 is
as follows (amounts in thousands):
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income.............................. $38,695 $27,969 $72,750 $69,890
Other comprehensive income (loss), net
of tax:
Net change in unrealized appreciation
(depreciation) on investments....... 609 (1,725) 227 (3,102)
------- ------- ------- -------
Comprehensive income.................... $39,304 $26,244 $72,977 $66,788
======= ======= ======= =======
</TABLE>
9
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. EARNINGS PER SHARE
Basic earnings per share excludes dilution and reflects income divided by
the weighted average shares of common stock outstanding during the periods
presented. Diluted earnings per share is based upon the weighted average shares
of common stock and dilutive common stock equivalents (all of which are
comprised of stock options) outstanding during the periods presented; no
adjustment to income is required. Common stock equivalents arising from dilutive
stock options are computed using the treasury stock method. There were 271,000
and 116,000 shares of common stock equivalents for the three and six months
ended June 30, 2000, respectively, and 882,000 and 39,000 shares of common stock
equivalents for the second quarter and six months ended June 30, 1999,
respectively.
5. SEGMENT INFORMATION
Presented below are segment data for the second quarter and six months ended
June 30, 2000 and 1999 (amounts in thousands):
<TABLE>
<CAPTION>
GOVERNMENT
CONTRACTS/
HEALTH PLAN SPECIALTY CORPORATE
SERVICES SERVICES AND OTHER TOTAL
----------- ---------- --------- ----------
<S> <C> <C> <C> <C>
SECOND QUARTER ENDED JUNE 30, 2000
Revenues from external sources.................. $1,795,591 $408,554 $ 25,455 $2,229,600
Intersegment revenues........................... 4,274 47,783 -- 52,057
Income (loss) before income taxes............... 70,091 28,910 (36,205) 62,796
Segment assets.................................. 2,515,299 778,480 256,478 3,550,257
SECOND QUARTER ENDED JUNE 30, 1999
Revenues from external sources.................. $1,743,698 $365,797 $ 16,166 $2,125,661
Intersegment revenues........................... 2,844 85,196 -- 88,040
Income (loss) before income taxes............... 30,140 23,572 (7,163) 46,549
Segment assets.................................. 2,460,191 672,471 323,956 3,456,618
SIX MONTHS ENDED JUNE 30, 2000
Revenues from external sources.................. $3,583,567 $797,534 $ 47,834 $4,428,935
Intersegment revenues........................... 6,687 95,080 -- 101,767
Income (loss) before income taxes and cumulative
effect of change in accounting principle...... 132,965 51,692 (66,599) 118,058
SIX MONTHS ENDED JUNE 30, 1999
Revenues from external sources.................. $3,516,078 $733,104 $ 95,421 $4,344,603
Intersegment revenues........................... 4,838 167,203 -- 172,041
Income before income taxes and cumulative effect
of change in accounting principle............. 38,637 56,169 30,522 125,328
SEGMENT ASSETS AS OF DECEMBER 31, 1999.......... $2,598,582 $796,358 $301,541 $3,696,481
</TABLE>
6. CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1999, the Company adopted Statement of Position 98-5
"Reporting on the Costs of Start-Up Activities" and changed its method of
accounting for start-up and organization costs.
10
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. CHANGE IN ACCOUNTING PRINCIPLE (CONTINUED)
The change involved expensing these costs as incurred, rather than the Company's
previous accounting principle of capitalizing and subsequently amortizing such
costs. The change in accounting principle resulted in the write-off of the costs
capitalized as of January 1, 1999. The cumulative effect of the write-off was
$5.4 million (net of tax benefit of $3.7 million) and has been expensed and
reflected in the condensed consolidated statement of operations for the six
months ended June 30, 1999.
7. DISPOSITION OF ASSETS
During the six months ended June 30, 1999, the Company completed the sale of
certain of its pharmacy benefits processing operations, its HMO operations in
the states of Texas, Louisiana and Oklahoma and its preferred provider
organization network subsidiary, Preferred Health Network, Inc. As part of the
transactions, the Company received certain cash proceeds of $76.0 million,
$10.7 million of convertible preferred stock and recognized a net gain of
$57.3 million, before taxes.
During the fourth quarter of 1999, the Company sold its Washington HMO
subsidiary to American Family Care, Inc. and entered into definitive agreements
with PacifiCare of Washington, Inc. and Premera Blue Cross to transition the
Company's commercial membership in Washington. During the fourth quarter 1999,
the Company also entered into a definitive agreement with PacifiCare of
Colorado, Inc. to transition the Company's HMO membership in Colorado. As of
June 30, 2000, the transitions were substantially completed.
8. LEGAL PROCEEDINGS
In April 2000, a lawsuit was filed against the Company and its wholly-owned
subsidiary Foundation Health Corporation ("FHC") in the United States Bankruptcy
Court for the Central District of California ("Bankruptcy Court"). The lawsuit
relates to the 1998 sale of Business Insurance Group, Inc. ("BIG"), a holding
company of workers' compensation companies operating primarily in California, by
FHC to Superior National Insurance Group, Inc. ("Superior"). On March 3, 2000,
the California Department of Insurance seized BIG and Superior's other
California insurance subsidiaries. On April 26, 2000, Superior filed for
bankruptcy. Two days later, Superior filed its lawsuit against the Company, FHC
and Milliman & Robertson, Inc. ("M&R"). Superior alleges that the BIG
transaction was a fraudulent transfer under federal and California bankruptcy
laws in that Superior did not receive reasonably equivalent value for the
$285 million in consideration paid for BIG; that the Company, FHC and M&R
defrauded Superior by making misstatements as to the adequacy of BIG's reserves;
that Superior is entitled to rescind its purchase of BIG; that Superior is
entitled to indemnification for losses it allegedly incurred in connection with
the BIG transaction; that FHC breached the Stock Purchase Agreement; and that
FHC and the Company were guilty of California securities laws violations in
connection with the sale of BIG. Superior seeks $300 million in compensatory
damages, unspecified punitive damages and the costs of the action, including
attorneys' fees. On August 1, 2000, a motion to remove the lawsuit from the
jurisdiction of the Bankruptcy Court to the United States District Court for the
Central District of California ("District Court") was granted and the lawsuit is
now pending in District Court. The Company believes that Superior's claims have
no merit whatsoever, and intends to defend itself vigorously in this litigation.
In September 1983, a lawsuit was filed by Baja Inc. ("Baja") against East
Los Angeles Doctors Hospital Foundation, Inc. ("Hospital") and Century Medicorp
("Century") arising out of a multi-phase
11
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. LEGAL PROCEEDINGS (CONTINUED)
written contract for operation of a pharmacy at the Hospital during the period
September 1978 through September 1983. In October 1992, FHC, now a subsidiary of
the Company, acquired the Hospital and Century, and thereafter continued the
vigorous defense of this action. In August 1993, the Court awarded Baja $549,532
on a portion of its claim. In December 1994, the Court concluded that Baja also
could seek certain additional damages subject to proof. On July 5, 1995, the
Court awarded Baja an additional $1,015,173 (plus interest) in lost profits
damages. In October 1995, both of the parties appealed. The Court of Appeal
reversed portions of the judgment, directing the trial court to conduct
additional hearings on Baja's damages. In January 2000, after further
proceedings on the issue of Baja's lost profits, the Court awarded Baja an
additional $4,996,019, plus prejudgment interest. In June 2000, the Company
filed an appeal of the Court's final judgment.
Complaints have been filed in federal and state courts seeking an
unspecified amount of damages on behalf of an alleged class of persons who
purchased shares of common stock, convertible subordinated debentures and
options to purchase common stock of FPA Medical Management, Inc. ("FPA") at
various times between February 3, 1997 and May 15, 1998. The FPA complaints name
as defendants FPA, certain of FPA's auditors, the Company and certain of the
Company's former officers. The FPA Complaints allege that the Company and
certain former officers violated federal and state securities laws by
misrepresenting and failing to disclose certain information about a 1996
transaction between the Company and FPA, about FPA's business and about the
Company's 1997 sale of FPA common stock held by the Company. All claims against
the Company's former officers were voluntarily dismissed from the consolidated
class actions in both federal and state court. The Company has filed a motion to
dismiss all claims asserted against it in the consolidated federal class actions
but has not formally responded to the other complaints. The Company believes
these suits against it are without merit and intends to vigorously defend the
actions.
In November 1999, a complaint was filed seeking certification of a
nationwide class action and alleges that cost containment measures used by
FHS-affiliated health maintenance organizations, preferred provider
organizations and point-of-service health plans violate provisions of the
federal Racketeer Influenced and Corrupt Organizations Act ("RICO") and the
federal Employee Retirement Income Security Act ("ERISA"). The action seeks
unspecified damages and injunctive relief. The case was stayed in January, 2000,
pending the resolution of various procedural issues involving similar actions
filed against Humana, Inc. in the Southern District of Florida. In June, 2000,
the plaintiffs filed an amended complaint in the Humana action to add claims
against other managed care organizations, including the Company. The Company
believes that the filing of such amended complaint was improper and intends to
take appropriate steps to have such amended complaint withdrawn. The Company
believes the suit against it is without merit and intends to vigorously defend
the action.
In December 1999, Physicians Health Services, Inc. ("PHS"), a subsidiary of
the Company, was sued by the Attorney General of Connecticut, Richard
Blumenthal, acting on behalf of a group of state residents. The lawsuit was
premised on ERISA, and alleged that PHS violated its duties under that Act by
managing its prescription drug formulary in a manner that serves its own
financial interest rather than those of plan beneficiaries. The suit sought to
have PHS revamp its formulary system, and to provide patients with written
denial notices and instructions on how to appeal. PHS filed a motion to dismiss
which asserted that the state residents the Attorney General purported to
represent all received a prescription drug appropriate for their conditions and
therefore suffered no injuries whatsoever, that
12
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. LEGAL PROCEEDINGS (CONTINUED)
his office lacked standing to bring the suit and that the allegations failed to
state a claim under ERISA. In July 2000, the court granted PHS' motion and
dismissed the action.
In May 2000, the California Medical Association filed a lawsuit, purportedly
on behalf of its member physicians, in the United States District Court for the
Northern District of California against several managed care organizations,
including the Company, entitled California Medical Association v. Blue Cross of
California, Inc., Pacificare Health Systems, Inc., Pacificare Operations, Inc.
and Foundation Health Systems, Inc. The plaintiff alleges that the manner in
which the defendants contract and interact with its member physicians violates
provisions of the federal Racketeer Influenced Corrupt Organizations Act
("RICO"). The action seeks declaratory and injunctive relief, as well as costs
and attorneys fees. The Company filed a motion to dismiss the action on various
grounds. In August 2000, plaintiffs in other actions pending against different
managed care organizations petitioned the Judicial Panel on Multi-District
Litigation to consolidate the California action with the other actions in the
U.S. District Court for the Northern District of Alabama. In light of the
pending petition, the California court stayed the action and the hearing on the
Company's motion to dismiss the complaint for ninety days pending a
determination of the petition to consolidate. Management believes that the suit
against the Company and the efforts to consolidate it with cases in Alabama are
without merit and intends to vigorously defend the action.
The Company and certain of its subsidiaries are also parties to various
other legal proceedings, many of which involve claims for coverage encountered
in the ordinary course of its business. Based in part on advice from litigation
counsel to the Company and upon information presently available, management of
the Company is of the opinion that the final outcome of all such proceedings
should not have a material adverse effect upon the Company's consolidated
financial position or results of operations.
9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, ("Interpretation 44") "Accounting for Certain
Transactions Involving Stock Compensation." Interpretation 44 provides guidance
on certain implementation issues related to Accounting Principles Board Opinion
25, "Accounting for Stock Issued to Employees." Interpretation 44 was effective
July 1, 2000, and the Company does not expect Interpretation 44 to have a
material impact on its consolidated financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued, then
subsequently amended, Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements." SAB 101, as amended, provides guidance on
applying generally accepted accounting principles to revenue recognition issues
in financial statements. The Company is required to adopt SAB 101 in the quarter
ended December 31, 2000. The Company does not expect the adoption of SAB 101 to
have a material effect on its consolidated financial position or results of
operations.
In June 1998, the Financial Accounting Standards Board issued, then
subsequently amended, Statement of Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities."
SFAS 133, as amended, is effective for all fiscal years beginning after
June 15, 2000. This statement establishes accounting and reporting standards
requiring that all
13
<PAGE>
FOUNDATION HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
derivatives be recorded in the balance sheet as either an asset or liability
measured at fair value and that changes in fair value be recognized currently in
earnings, unless specific hedge accounting criteria are met. The Company is
required to adopt SFAS 133, as amended, in the first quarter of 2001. The
Company is currently in the process of evaluating its financial instruments and
contracts. The Company does not expect the adoption of SFAS 133 to have a
material effect on its consolidated financial position or results of operations.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Foundation Health Systems, Inc. (together with its subsidiaries, the
"Company") is an integrated managed care organization which administers the
delivery of managed health care services. Through its subsidiaries, the Company
offers group, individual, Medicaid and Medicare health maintenance organization
("HMO") and preferred provider organization ("PPO") plans; government sponsored
managed care plans; and managed care products related to administration and cost
containment, behavioral health, dental, vision and pharmaceutical products and
other services.
The Company currently operates within two segments of the managed health
care industry: Health Plan Services and Government Contracts/Specialty Services.
During 1999, the Health Plan Services segment consisted of four regional
divisions: Arizona (Arizona and Utah), California (encompassing only the State
of California), Central (Colorado, Florida, Idaho, Louisiana, New Mexico,
Oklahoma, Oregon, Texas and Washington) and Northeast (Connecticut, New Jersey,
New York, Ohio, Pennsylvania and West Virginia). During 1999, the Company either
divested its health plans or entered into arrangements to transition the
membership of its health plans in the states of Colorado, Idaho, Louisiana, New
Mexico, Oklahoma, Texas, Utah and Washington. Effective January 1, 2000, as a
result of such divestitures, the Company consolidated and reorganized its Health
Plan Services segment into two regional divisions, the Eastern Division
(consisting of Connecticut, Florida, New Jersey, New York, Ohio, Pennsylvania
and West Virginia) and the Western Division (consisting of Arizona, California
and Oregon). The Company is one of the largest managed health care companies in
the United States, with approximately 3.8 million at-risk and administrative
services only ("ASO") members in its Health Plan Services segment. The Company
also owns health and life insurance companies licensed to sell insurance in 33
states and the District of Columbia.
The Government Contracts/Specialty Services segment administers large,
multi-year managed health care government contracts. Certain components of these
contracts, including administrative and assumption of health care risk, are
subcontracted to affiliated and unrelated third parties. The Company administers
health care programs covering approximately 1.5 million eligible individuals
under TRICARE (formerly known as the Civilian Health and Medical Program of the
Uniformed Services). The Company has three TRICARE contracts that cover Alaska,
Arkansas, California, Hawaii, Oklahoma, Oregon, Texas, Washington and parts of
Arizona, Idaho and Louisiana. Through this segment, the Company offers
behavioral health, dental and vision services as well as managed care products
related to bill review, administration and cost containment for hospitals,
health plans and other entities.
This discussion and analysis and other portions of this Form 10-Q contains
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933,
as amended, that involve risks and uncertainties. All statements other than
statements of historical information provided herein may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects" and similar expressions are
intended to identify forward-looking statements. Factors that could cause actual
results to differ materially from those reflected in the forward-looking
statements include, but are not limited to, the risks discussed in the
"Cautionary Statements" section included in the Company's 1999 Annual Report on
Form 10-K filed with the SEC and the risks discussed in the Company's other
filings with the SEC. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis, judgment,
belief or expectation only as of the date hereof.
CONSOLIDATED OPERATING RESULTS
The Company's net income for the second quarter ended June 30, 2000 was
$38.7 million, or $0.32 per basic and diluted share, compared to net income for
the same period in 1999 of $28.0 million, or
15
<PAGE>
$0.23 per basic and diluted share. The Company's net income for the six months
ended June 30, 2000 was $72.8 million, or $0.59 per basic and diluted share,
compared to net income for the same period in 1999 of $69.9 million, or $0.57
per basic and diluted share including a $57.3 million gain on sale of businesses
and buildings as described below.
Included in the Company's results for the second quarter and six months
ended June 30, 1999, the Company recorded a loss of $3.3 million and a net gain
of $57.3 million, respectively, on the sale of its HMO operations in the states
of Texas, Louisiana and Oklahoma, its preferred provider organization network
subsidiary, Preferred Health Network, Inc. and certain of its pharmacy benefit
processing operations. Also included in the results from operations for the six
months ended June 30, 1999 are pretax charges for restructuring and other costs
of $21.1 million and a cumulative effect of a change in accounting principle,
net of tax of $5.4 million.
The following provides selected financial and operating information related
to the Company's performance for the second quarter and six months ended
June 30, 2000 and 1999, respectively. Certain 1999 amounts have been
reclassified to conform to the 2000 presentation. These reclassifications did
not affect net income or earnings per share.
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER MEMBER PER MONTH DATA)
<S> <C> <C> <C> <C>
REVENUES:
Health plan premiums.......................... $1,795,591 $1,743,698 $3,583,567 $3,516,078
Government contracts/Specialty services....... 408,554 365,797 797,534 733,104
Investment and other income................... 25,455 19,494 47,834 38,151
Net gain (loss) on sale of businesses......... -- (3,328) -- 57,270
---------- ---------- ---------- ----------
TOTAL REVENUES.............................. 2,229,600 2,125,661 4,428,935 4,344,603
---------- ---------- ---------- ----------
EXPENSES:
Health plan services.......................... 1,530,497 1,474,360 3,053,015 2,977,062
Government contracts/Specialty services....... 272,694 241,840 527,357 480,894
Selling, general and administrative........... 314,885 314,674 633,982 641,361
Depreciation.................................. 17,072 17,037 33,952 34,776
Amortization.................................. 9,723 10,544 19,304 21,528
Interest...................................... 21,933 20,657 43,267 42,595
Restructuring and other costs................. -- -- -- 21,059
---------- ---------- ---------- ----------
TOTAL EXPENSES.............................. 2,166,804 2,079,112 4,310,877 4,219,275
---------- ---------- ---------- ----------
Income before income tax provision and
cumulative effect of a change in accounting
principle..................................... 62,796 46,549 118,058 125,328
Income tax provision............................ 24,101 18,580 45,308 50,021
---------- ---------- ---------- ----------
Income before cumulative effect of a change in
accounting principle.......................... 38,695 27,969 72,750 75,307
Cumulative effect of a change in accounting
principle..................................... -- -- -- (5,417)
---------- ---------- ---------- ----------
Net income...................................... $ 38,695 $ 27,969 $ 72,750 $ 69,890
========== ========== ========== ==========
Health plan MCR................................. 85.2% 84.6% 85.2% 84.7%
Government contracts/Specialty services MCR..... 66.7% 66.1% 66.1% 65.6%
Overall MCR..................................... 81.8% 81.4% 81.7% 81.4%
Administrative (SG&A + Depreciation) Ratio...... 15.1% 15.7% 15.2% 15.9%
Health plan premiums per member per month....... $ 155.15 $ 137.18 $ 153.75 $ 137.34
Health plan services per member per month....... $ 132.24 $ 115.99 $ 130.99 $ 116.29
</TABLE>
16
<PAGE>
ENROLLMENT INFORMATION
JUNE 30
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PERCENT
2000 1999 CHANGE
-------- -------- --------
<S> <C> <C> <C>
Health Plan Services:
Commercial............................................... 2,894 3,073 (5.8)%
Medicare Risk............................................ 262 269 (2.6)%
Medicaid................................................. 611 673 (9.2)%
----- ----- -----
3,767 4,015 (6.2)%
===== ===== =====
Government Contracts:
TRICARE PPO and Indemnity................................ 564 684 (17.5)%
TRICARE HMO.............................................. 891 817 9.1 %
----- ----- -----
1,455 1,501 (3.1)%
===== ===== =====
</TABLE>
REVENUES AND HEALTH CARE COSTS
The Company's total revenues increased by $103.9 million or 4.9% for the
second quarter ended June 30, 2000 and $84.3 million or 1.9% for the six months
ended June 30, 2000 as compared to the same periods in 1999. Health Plan
premiums increased by $51.9 million or 3.0% for the second quarter ended
June 30, 2000 and $67.5 million or 1.9% for the six months ended June 30, 2000
as compared to same periods in 1999. This growth is primarily due to the Company
instituting more rigorous pricing discipline resulting in a 11.9% increase in
Health Plan premiums revenue on a per member per month basis for the six months
ended June 30, 2000, partially offset by a 6.2% decrease in period-end
enrollment in the Company's health plans as of June 30, 2000 as compared to the
same period in 1999. The 248,000 decrease in Health Plan membership at June 30,
2000 as compared to June 30, 1999 reflects the reduction of 278,000 members
enrolled in health plans sold by the Company. This reduction in membership is
partially offset by an increase of 30,000 members, primarily from the California
point-of-service small group market.
Commercial same-store premium rates increased 8.0% for the second quarter
and six months ended June 30, 2000 as compared to the same periods in 1999.
Commercial same-store period-end enrollment increased by 38,000 members as of
June 30, 2000. Medicare enrollment declined 2.6% at June 30, 2000 as compared to
June 30, 1999 due to the Company's planned exit from certain counties. The
Company announced that it intends to exit the Medicare program in 18 counties
across six states, affecting more than 19,000 Medicare members. Medicaid
enrollment declined by 9.2% at June 30, 2000 as compared to June 30, 1999
primarily due to health plan divestitures.
Health Plan Services costs increased by $56.1 million or 3.8% for the second
quarter ended June 30, 2000 and $76.0 million or 2.6% for the six months ended
June 30, 2000 as compared to the same periods in 1999. The Health Plan Services
medical care ratio ("MCR") for the second quarter ended June 30, 2000 increased
to 85.2% from 84.6% and for the six months ended June 30, 2000 increased to
85.2% from 84.7% as compared to the same periods in 1999, respectively. The
increase in the MCR is due to a 9.0% increase in pharmacy costs and the sale of
two hospitals during the third quarter of 1999. These two hospitals accounted
for approximately $13.0 million and $27.0 million in health plan revenues in the
second quarter and six months ended June 30, 1999 with no associated health care
costs.
Government Contracts/Specialty Services revenue increased by $42.8 million
or 11.7% during the second quarter ended June 30, 2000 and $64.4 million or 8.8%
during the six months ended June 30, 2000 as compared to the same periods in
1999. The increase in Government Contracts/Specialty Services segment revenues
was primarily due to increases in government contracts and growth in the
Company's mental health subsidiary.
17
<PAGE>
The Government Contracts/Special Services MCR increased to 66.7% from 66.1%
for the second quarter ended June 30, 2000 and to 66.1% from 65.6% for the six
months ended June 30, 2000 as compared to the same periods in 1999. The increase
in the MCR is primarily due to the movement of health care services from
military treatment facilities to civilian facilities during 1999 which had a
continued effect and resulted in higher costs than originally specified in the
contract for the second quarter and six months ended June 30, 2000.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
The Company's selling, general and administrative ("SG&A") expenses were
flat for the second quarter ended June 30, 2000 and decreased $7.4 million or
1.2% for the six months ended June 30, 2000 as compared to the same period in
1999. The administrative ratio (SG&A + Depreciation as a percentage of health
plan and government revenues) declined by approximately 60 and 70 basis points
in the second quarter and six months ended June 30, 2000, respectively. This
decrease is primarily attributable to the Company's divestiture of non-core
operations during the last two quarters of 1999, the consolidation of certain of
its health plan operations.
AMORTIZATION AND DEPRECIATION
Amortization and depreciation expense decreased by $0.8 million or 2.8% for
the second quarter ended June 30, 2000 and $3.0 million or 5.4% for the six
months ended June 30, 2000, as compared to the same periods in 1999. These
changes reflect decreases of $12.6 million and $17.5 million in goodwill and
fixed assets, respectively, as a result of divestitures of non-core operations.
INTEREST EXPENSE
Interest expense increased by $1.3 million or 6.2% for the second quarter
ended June 30, 2000 and $0.7 million or 1.6% for the six months ended June 30,
2000 as compared to the same periods in 1999. The increase in interest expense
reflects the higher average borrowing rate of 7.3% during the second quarter and
six months ended June 30, 2000, as compared to 6.2% and 6.3% in the same periods
in 1999, respectively. This increase in the average borrowing rate was partially
offset by a reduction in the average revolving credit facility balance.
INCOME TAX PROVISION
The effective tax rate was 38.4% for the second quarter and six months ended
June 30, 2000, compared to the effective tax rate on operations of 39.9% for the
same periods in 1999. The effective tax rate for the full year 1999 was 39.4%.
The decrease in the effective tax rate reflects the Company's current business
mix after divestiture of non-core operations and was also due to income earned
in lower state taxing jurisdictions.
The effective tax rate of 38.4% for the second quarter and six months ended
June 30, 2000 differed from the statutory federal tax rate of 35.0% due
primarily to state income taxes, goodwill amortization, and tax-exempt
investment income.
RESTRUCTURING AND OTHER COSTS
This section should be read in conjunction with Note 2, and the tables
contained therein, to the condensed consolidated financial statements.
1999 CHARGES
The Company initiated during the fourth quarter of 1998 a formal plan to
dispose of certain health plans of the Company's then Central Division included
in the Company's Health Plan Services segment in accordance with its anticipated
divestitures program. In this connection, the Company announced its plan to
close the Colorado regional processing center, terminate employees associated
with the support
18
<PAGE>
center and transfer these operations to the Company's other administrative
facilities. In addition, the Company announced its plans to consolidate certain
administrative functions in its Oregon and Washington health plan operations.
During the first quarter ended March 31, 1999, the Company recorded pretax
charges for restructuring and other charges of $21.1 million which included
$18.5 million for severance and benefit related costs related to executives and
operations employees at the Colorado regional processing center and at the
Oregon and Washington health plans, and $2.6 million for the termination of real
estate obligations and other costs to close the Colorado regional processing
center. As of June 30, 2000, $3.0 million of such charges is expected to require
future outlays of cash in 2000. As the closing of the Colorado regional
processing center (which is expected to be substantially completed in the third
quarter of 2000) was related to the disposition of certain health plans of the
Company's former Central Division, management does not expect the closure to
have a significant impact on future results of operations or cash flows. During
the fourth quarter of 1999, the Company recorded asset impairment costs totaling
$6.2 million in connection with pending dispositions of non-core businesses.
These charges included a further adjustment of $4.7 million to adjust the
carrying value of the Company's Ohio, West Virginia and West Pennsylvania
operations to fair value for which the Company previously recorded an impairment
charge in 1998. The Company also adjusted the carrying value of its subacute
care management operations by $1.5 million to fair value. The revenue and pretax
loss attributable to these operations were $32 million and $0.3 million,
respectively, for the six months ended June 30, 2000. The carrying value of
these assets as of June 30, 2000 was $16.3 million.
1998 CHARGES
In connection with the Company's 1998 restructuring plans, severance, asset
impairment and other costs totaling $240.1 million were recorded during the year
ended December 31, 1998. As of December 31, 1999, the 1998 restructuring plans
were completed.
On July 19, 1998, FPA Medical Management, Inc. ("FPA") filed for bankruptcy
protection under Chapter 11 of the Bankruptcy Code. The FPA bankruptcy and
related events and circumstances caused management to re-evaluate the decision
to continue to operate 14 facilities previously leased to FPA and management
determined to sell the properties. As part of the 1998 Charges, the Company
recorded $84.1 million of asset impairment costs related to the 14 properties
and other costs related to FPA. The carrying value of the assets held for
disposal totaled $9.9 million at June 30, 2000. As of June 30, 2000, 12 of these
properties have been sold which has resulted in net gains of $5.0 million during
1999 and $3.6 million in 1998 which were included in net gains on sale of
businesses and buildings. The remaining properties are expected to be sold
during 2000.
During the fourth quarter of 1998, the Company initiated a formal plan to
dispose of certain health plans of the Company's then Central Division included
in the Company's Health Plan Services segment in accordance with its anticipated
divestitures program. The Company sold and/or transitioned to third parties a
majority of the business of these health plans during 1999. Revenues and pretax
losses attributable to the remaining plans identified for disposition were
$8.2 million and $0.3 million, respectively, for the six months ended June 30,
2000. The carrying value of these assets as of June 30, 2000 was $9.1 million.
No subsequent adjustments were made to these assets in 2000. As discussed under
"1999 Charges," further adjustments to carrying value of $4.7 million were
recorded in 1999.
IMPACT OF INFLATION AND OTHER ELEMENTS
The managed health care industry is labor intensive and its profit margin is
low; hence, it is especially sensitive to inflation. Increases in medical
expenses or contracted medical rates without corresponding increases in premiums
could have a material adverse effect on the Company.
Various federal and state legislative initiatives regarding the health care
industry have been proposed during recent legislative sessions, and health care
reform and similar issues continue to be in
19
<PAGE>
the forefront of social and political discussion. If health care reform or
similar legislation is enacted, such legislation could impact the Company.
Management cannot at this time predict whether any such initiative will be
enacted and, if enacted, the impact on the financial condition or results of
operations of the Company.
The Company's ability to expand its business is dependent, in part, on
competitive premium pricing and its ability to secure cost-effective contracts
with providers. Achieving these objectives is becoming increasingly difficult
due to the competitive environment. In addition, the Company's profitability is
dependent, in part, on its ability to maintain effective control over health
care costs while providing members with quality care. Factors such as health
care reform, regulatory changes, integration of acquired companies, increased
cost of medical services, utilization, new technologies, hospital costs, major
epidemics and numerous other external influences may affect the Company's
operating results. Accordingly, past financial performance is not necessarily a
reliable indicator of future performance, and investors should not use
historical records to anticipate results or future period trends.
The Company's HMO and insurance subsidiaries are required to maintain
reserves to cover their estimated ultimate liability for expenses with respect
to reported and unreported claims incurred. These reserves are estimates of
future payments based on various assumptions. Establishment of appropriate
reserves is an inherently uncertain process, and there can be no certainty that
currently established reserves will prove adequate in light of subsequent actual
experience, which in the past has resulted, and in the future could result, in
loss reserves being too high or too low. The accuracy of these estimates may be
affected by external forces such as changes in the rate of inflation, the
regulatory environment, medical costs and other factors. Future loss development
or governmental regulators could require reserves for prior periods to be
increased, which would adversely impact earnings in future periods. In light of
present facts and current legal interpretations, management believes that
adequate provisions have been made for claims and loss reserves.
The Company's HMO subsidiaries contract with providers in California, and to
a lesser degree in other areas, primarily through capitation fee arrangements.
Under a capitation fee arrangement, the Company's subsidiary pays the provider a
fixed amount per member on a regular basis and the provider accepts the risk of
the frequency and cost of member utilization of services. The inability of
providers to properly manage costs under capitation arrangements can result in
financial instability of such providers. Any financial instability of capitated
providers could lead to claims for unpaid health care against the Company's HMO
subsidiaries, even though such subsidiaries have made their regular payments to
the capitated providers. Depending on state law, the Company's HMO subsidiaries
may or may not be liable for such claims. In California, the issue of whether
HMOs are liable for unpaid provider claims has not been definitively settled.
However, the California Department of Corporations ("DOC") has issued a written
statement to the effect that HMOs are not liable for such claims, but there is
currently ongoing litigation on the subject. Please refer to Part II. of this
Form 10-Q for further information.
LIQUIDITY AND CAPITAL RESOURCES
Certain of the Company's subsidiaries must comply with minimum capital and
surplus requirements under applicable state laws and regulations, and must have
adequate reserves for claims. Certain subsidiaries must maintain ratios of
current assets to current liabilities pursuant to certain government contracts.
The Company believes it is in compliance with these contractual and regulatory
requirements in all material respects.
The Company believes that cash from operations, existing working capital,
lines of credit, and funds from planned divestitures of business are adequate to
fund existing obligations, introduce new products and services, and continue to
develop health care-related businesses. The Company regularly evaluates cash
requirements for current operations and commitments, and for capital
acquisitions and
20
<PAGE>
other strategic transactions. The Company may elect to raise additional funds
for these purposes, either through additional debt or equity, the sale of
investment securities or otherwise, as appropriate.
Government health care receivables are best estimates of payments that are
ultimately collectible or payable. Since these amounts are subject to government
audit, negotiation and appropriations, amounts ultimately collected may vary
significantly from current estimates. Additionally, the timely collection of
such receivables is also impacted by government audit and negotiation and could
extend for periods beyond a year.
For the six months ended June 30, 2000, cash used by operating activities
was $65.2 million compared to $147.0 million in the same period of 1999. This
change was primarily due to favorable timing of Medicare payments, offset by
increases in the amounts receivable under government contracts and decreases in
the reserves for claims and other settlements. Net cash used in investing
activities was $10.3 million during the six months ended June 30, 2000 as
compared to net cash provided by investing activities of $22.3 million during
the same period in 1999. This decrease was primarily due to a decrease in the
net purchases and sales of investments, coupled with the decrease in the
proceeds from the sale of businesses. Net cash used in financing activities was
$46.4 million during the six months ended June 30, 2000 as compared to
$163.5 million during the same period in 1999. The change was primarily due to a
reduction in the repayment of funds drawn under the Company's Credit Facility
(as defined below).
The Company has a $1.5 billion credit facility (the "Credit Facility"), with
Bank of America as Administrative Agent for the Lenders thereto, which was
amended by a Letter Agreement dated as of March 27, 1998 and Amendments in
April, July, and November 1998 and in March 1999 with the Lenders (the
"Amendments"). All previous revolving credit facilities were terminated and
rolled into the Credit Facility on July 8, 1997. At the election of the Company,
and subject to customary covenants, loans are initiated on a bid or committed
basis and carry interest at offshore or domestic rates, at the applicable LIBOR
rate plus margin or the bank reference rate. Actual rates on borrowings under
the Credit Facility vary, based on competitive bids and the Company's unsecured
credit rating at the time of the borrowing. As of June 30, 2000, the Company was
in compliance with the financial covenants of the Credit Facility, as amended by
the Amendments. As of June 30, 2000, the maximum commitment level under the
Credit Agreement was approximately $1.36 billion, of which approximately
$368.0 million remained available. The Credit Facility expires in July 2002, but
it may be extended under certain circumstances for two additional years.
The Company's subsidiaries must comply with certain minimum capital
requirements under applicable state laws and regulations. The Company will,
however, make contributions to its subsidiaries, as necessary, to meet
risk-based capital requirements under state laws and regulations. The Company
contributed $11.9 million to certain of its subsidiaries to meet capital
requirements during the second quarter ended June 30, 2000. As of June 30, 2000,
the Company's subsidiaries were in compliance with minimum capital requirements.
In July of 2000, the Company contributed $6 million to certain of its
subsidiaries. In 2001, subject to adoption of the codification of statutory
accounting principles by the various states, the amount of capital contributions
required to meet risk-based capital and other minimum capital requirements may
change. The Company is currently in the process of evaluating the effect of such
codification on its capital and surplus positions.
Legislation has been or may be enacted in certain states in which the
Company's subsidiaries operate imposing substantially increased minimum capital
and/or statutory deposit requirements for HMOs in such states. Such statutory
deposits may only be drawn upon under limited circumstances relating to the
protection of policyholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate and market risk primarily due to its
investing and borrowing activities. Market risk generally represents the risk of
loss that may result from the potential
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<PAGE>
change in the value of a financial instrument as a result of fluctuations in
interest rates and in equity prices. Interest rate risk is a consequence of
maintaining fixed income investments. The Company is exposed to interest rate
risks arising from changes in the level or volatility of interest rates,
prepayment speeds and/or the shape and slope of the yield curve. In addition,
the Company is exposed to the risk of loss related to changes in credit spreads.
Credit spread risk arises from the potential that changes in an issuer's credit
rating or credit perception may affect the value of financial instruments.
The Company has several bond portfolios to fund reserves. The Company
attempts to manage the interest rate risks related to its investment portfolios
by actively managing the asset/liability duration of its investment portfolios.
The overall goal of the investment portfolios is to provide a source of
liquidity and support the ongoing operations of the Company's business units.
The Company's philosophy is to actively manage assets to maximize total return
over a multiple-year time horizon, subject to appropriate levels of risk. Each
business unit will have additional requirements with respect to liquidity,
current income and contribution to surplus. The Company manages these risks by
setting risk tolerances, targeting asset-class allocations, diversifying among
assets and asset characteristics, and using performance measurement and
reporting.
The Company uses a value-at-risk ("VAR") model, which follows a
variance/covariance methodology, to assess the market risk for its investment
portfolio. VAR is a method of assessing investment risk that uses standard
statistical techniques to measure the worst expected loss in the portfolio over
an assumed portfolio disposition period under normal market conditions. The
determination is made at a given statistical confidence level.
The Company assumed a portfolio disposition period of 30 days with a
confidence level of 95 percent for the 2000 computation of VAR. The computation
further assumes that the distribution of returns is normal. Based on such
methodology and assumptions, the computed VAR was approximately $2.8 million as
of June 30, 2000.
The Company's calculated value-at-risk exposure represents an estimate of
reasonably possible net losses that could be recognized on its investment
portfolios assuming hypothetical movements in future market rates and are not
necessarily indicative of actual results which may occur. It does not represent
the maximum possible loss nor any expected loss that may occur, since actual
future gains and losses will differ from those estimated, based upon actual
fluctuations in market rates, operating exposures, and the timing thereof, and
changes in the Company's investment portfolios during the year. The Company,
however, believes that any loss incurred would be offset by the effects of
interest rate movements on the respective liabilities, since these liabilities
are affected by many of the same factors that affect asset performance; that is,
economic activity, inflation and interest rates, as well as regional and
industry factors.
In addition, the Company has some interest rate market risk due to its
borrowings. Notes payable, capital leases and other financing arrangements
totaled $993.7 million at June 30, 2000 and the related average interest rate
was 7.7% (which interest rate is subject to change pursuant to the terms of the
Credit Facility) for the six months ended June 30, 2000. See a description of
the Credit Facility under "Liquidity and Capital Resources." The table below
presents the expected future cash outflows of market risk sensitive instruments
at June 30, 2000. These cash outflows include both expected future principal and
interest payments consistent with the terms of the outstanding debt as of
June 30, 2000 (amounts in thousands).
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 BEYOND TOTAL
-------- -------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term floating rate borrowings:
Interest.............................. 46,188 84,460 41,883 -- -- -- 172,531
Principal............................. -- -- 993,000 -- -- -- 993,000
------ ------ --------- --------- --------- --------- ---------
Total Cash Outflows................... 46,188 84,460 1,034,883 -- -- -- 1,165,531
====== ====== ========= ========= ========= ========= =========
</TABLE>
22
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SUPERIOR NATIONAL INSURANCE GROUP INC.
The Company and its wholly-owned subsidiary, Foundation Health Corporation
("FHC"), have been named in an adversary proceeding, Superior National Insurance
Group, Inc. v. Foundation Health Corporation, Foundation Health Systems, Inc.
and Milliman & Robertson, Inc. ("M&R"), filed on April 28, 2000, in the United
States Bankruptcy Court for the Central District of California, case number
SV00-14099GM. The lawsuit relates to the 1998 sale of Business Insurance
Group, Inc., a holding company of workers' compensation companies operating
primarily in California ("BIG"), by FHC to Superior National Insurance
Group, Inc. ("Superior").
On March 3, 2000, the California Department of Insurance seized BIG and
Superior's other California insurance subsidiaries. On April 26, 2000, Superior
filed for bankruptcy. Two days later, Superior filed its lawsuit against the
Company, FHC and M&R.
Superior alleges that the BIG transaction was a fraudulent transfer under
federal and California bankruptcy laws in that Superior did not receive
reasonably equivalent value for the $285 million in consideration paid for BIG;
that the Company, FHC and M&R defrauded Superior by making misstatements as to
the adequacy of BIG's reserves; that Superior is entitled to rescind its
purchase of BIG; that Superior is entitled to indemnification for losses it
allegedly incurred in connection with the BIG transaction; that FHC breached the
Stock Purchase Agreement; and that FHC and the Company were guilty of California
securities laws violations in connection with the sale of BIG. Superior seeks
$300 million in compensatory damages, unspecified punitive damages and the costs
of the action, including attorneys' fees.
On August 1, 2000, a motion filed by the Company and FHC to remove the
lawsuit from the jurisdiction of the Bankruptcy Court to the United States
District Court for the Central District of California was granted, and the
lawsuit is now pending in the District Court under case number SACV00-0658 GLT.
The Company believes that Superior's claims have no merit whatsoever, and
intends to defend itself vigorously in this litigation.
FPA MEDICAL MANAGEMENT, INC.
Since May 1998, several complaints (the "FPA Complaints") have been filed in
federal and state courts seeking an unspecified amount of damages on behalf of
an alleged class of persons who purchased shares of common stock, convertible
subordinated debentures and options to purchase common stock of FPA Medical
Management, Inc. ("FPA") at various times between February 3, 1997 and May 15,
1998. The FPA Complaints name as defendants FPA, certain of FPA's auditors, the
Company and certain of the Company's former officers. The FPA Complaints allege
that the Company and such former officers violated federal and state securities
laws by misrepresenting and failing to disclose certain information about a 1996
transaction between the Company and FPA, about FPA's business and about the
Company's 1997 sale of FPA common stock held by the Company. All claims against
the Company's former officers were voluntarily dismissed from the consolidated
class actions in both federal and state court. The Company has filed a motion to
dismiss all claims asserted against it in the consolidated federal class actions
but has not formally responded to the other complaints. Management believes
these suits against the Company are without merit and intends to vigorously
defend the actions.
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<PAGE>
PAY V. FOUNDATION HEALTH SYSTEMS, INC.
On November 22, 1999, a complaint was filed in the United States District
Court for the Southern District of Mississippi in a lawsuit entitled Pay v.
Foundation Health Systems, Inc. (2:99CV329). The two count complaint seeks
certification of a nationwide class action and alleges that cost containment
measures used by FHS-affiliated health maintenance organizations, preferred
provider organizations and point-of-service health plans violate provisions of
the federal Racketeer Influenced and Corrupt Organizations Act ("RICO") and the
federal Employee Retirement Income Security Act ("ERISA"). The action seeks
unspecified damages and injunctive relief.
The case was stayed on January 25, 2000, pending the resolution of various
procedural issues involving similar actions filed against Humana, Inc. in the
Southern District of Florida. On June 23, 2000, the plaintiffs filed an amended
complaint in the Humana action to add claims against other managed care
organizations, including the Company. The Company believes that the filing of
such amended complaint was improper and intends to take appropriate steps to
have such amended complaint withdrawn. Management believes the suit against the
Company is without merit and intends to vigorously defend the action.
BAJA INC. V. LOS ANGELES MEDICAL MANAGEMENT CORP., EAST LOS ANGELES DOCTORS
HOSPITAL FOUNDATION, INC.
In September 1983, a lawsuit was filed in Los Angeles Superior Court by
Baja Inc. ("Baja") against East Los Angeles Doctors Hospital Foundation, Inc.
("Hospital") and Century Medicorp ("Century") arising out of a multi-phase
written contract for operation of a pharmacy at the Hospital during the period
September 1978 through September 1983. In October 1992, Foundation Health
Corporation, now a subsidiary of the Company, acquired the Hospital and Century,
and thereafter continued the vigorous defense of this action. In August 1993,
the Court awarded Baja $549,532 on a portion of its claim. In December 1994, the
Court concluded that Baja also could seek certain additional damages subject to
proof. On July 5, 1995, the Court awarded Baja an additional $1,015,173 (plus
interest) in lost profits damages. In October 1995, both of the parties
appealed. The Court of Appeal reversed portions of the judgment, directing the
trial court to conduct additional hearings on Baja's damages. In January 2000,
after further proceedings on the issue of Baja's lost profits, the Court awarded
Baja $4,996,019 in addition to the previous amounts, plus prejudgment interest.
In June 2000, the Company filed an appeal of the Court's final judgment.
STATE OF CONNECTICUT V. PHYSICIANS HEALTH SERVICES, INC.
Physicians Health Services, Inc. ("PHS"), a subsidiary of the Company, was
sued on December 14, 1999 in the United States District Court in Connecticut by
the Attorney General of Connecticut, Richard Blumenthal, acting on behalf of a
group of state residents. The lawsuit was premised on ERISA, and alleged that
PHS violated its duties under that Act by managing its prescription drug
formulary in a manner that served its own financial interest rather than those
of plan beneficiaries. The suit sought to have PHS revamp its formulary system,
and to provide patients with written denial notices and instructions on how to
appeal. PHS filed a motion to dismiss which asserted that the state residents
the Attorney General purported to represent all received a prescription drug
appropriate for their conditions and therefore suffered no injuries whatsoever,
that his office lacked standing to bring the suit and that the allegations
failed to state a claim under ERISA. On July 12, 2000, the court granted PHS'
motion and dismissed the action.
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<PAGE>
CALIFORNIA MEDICAL ASSOCIATION V. BLUE CROSS OF CALIFORNIA, INC., PACIFICARE
HEALTH SYSTEMS, INC., PACIFICARE OPERATIONS, INC. AND FOUNDATION HEALTH
SYSTEMS, INC.
In May 2000, the California Medical Association filed a lawsuit, purportedly
on behalf of its member physicians, in the United States District Court for the
Northern District of California against several managed care organizations,
including the Company, entitled California Medical Association v. Blue Cross of
California, Inc., Pacificare Health Systems, Inc., Pacificare Operations, Inc.
and Foundation Health Systems, Inc. The plaintiff alleges that the manner in
which the defendants contract and interact with its member physicians violates
provisions of the federal Racketeer Influenced Corrupt Organizations Act
("RICO"). The action seeks declaratory and injunctive relief, as well as costs
and attorneys fees. The Company filed a motion to dismiss the action on various
grounds. In August 2000, plaintiffs in other actions pending against different
managed care organizations petitioned the Judicial Panel on Multi-District
Litigation to consolidate the California action with the other actions in the
U.S. District Court for the Northern District of Alabama. In light of the
pending petition, the California court stayed the action and the hearing on the
Company's motion to dismiss the complaint for ninety days pending a
determination of the petition to consolidate. Management believes that the suit
against the Company and the efforts to consolidate it with cases in Alabama are
without merit and intends to vigorously defend the action.
MISCELLANEOUS PROCEEDINGS
The Company and certain of its subsidiaries are also parties to various
other legal proceedings, many of which involve claims for coverage encountered
in the ordinary course of its business. Based in part on advice from litigation
counsel to the Company and upon information presently available, management of
the Company is of the opinion that the final outcome of all such proceedings
should not have a material adverse effect upon the Company's results of
operations or financial condition.
ITEM 2. CHANGES IN SECURITIES
REVOLVING CREDIT FACILITY
The Company has an unsecured, five-year $1.5 billion revolving credit
facility pursuant to a Credit Agreement dated July 8, 1997 (the "Credit
Agreement") with the banks identified in the Credit Agreement (the "Banks") and
Bank of America National Trust and Savings Association ("Bank of America") as
Administrative Agent. All previous revolving credit facilities were terminated
and rolled into the Credit Agreement. The Credit Agreement contains customary
representations and warranties, affirmative and negative covenants, and events
of default. Specifically, Section 7.11 of the Credit Agreement provides that the
Company and its subsidiaries may, so long as no event of default exists:
(i) declare and distribute stock as a dividend; (ii) purchase, redeem or acquire
its stock, options and warrants with the proceeds of concurrent public
offerings; and (iii) declare and pay dividends or purchase, redeem or otherwise
acquire its capital stock, warrants, options or similar rights with cash subject
to certain specified limitations.
Under the Credit Agreement, as amended pursuant to a Letter Agreement dated
as of March 27, 1998, the First Amendment and Waiver to Credit Agreement dated
as of April 6, 1998, the Second Amendment to Credit Agreement dated as of
July 31, 1998, the Third Amendment to Credit Agreement dated as of November 6,
1998 and the Fourth Amendment of Credit Agreement dated as of March 26, 1999
(collectively, the "Amendments") with the Banks, the Company is: (i) obligated
to maintain certain covenants keyed to the Company's financial condition and
performance (including a Total Leverage Ratio and Fixed Charge Ratio);
(ii) obligated to limit liens; (iii) subject to customary covenants, including
(A) disposition of assets only in the ordinary course and generally at fair
value and (B) restrictions on acquisitions, mergers, consolidations, loans,
leases, joint ventures, contingent obligations and certain transactions with
affiliates; and (iv) permitted to incur additional indebtedness
25
<PAGE>
in an aggregate amount not to exceed $1,000,000,000 upon certain terms and
conditions. The Credit Agreement also provides for mandatory prepayment of the
outstanding loans under the Credit Agreement with a certain portion of the
proceeds from the issuance of such indebtedness and from the sales of assets,
resulting in a permanent reduction of the aggregate amount of commitments under
the Credit Agreement by the amount so prepaid. As of June 30, 2000, the maximum
commitment level permitted under the Credit Agreement was approximately
$1.36 billion, of which approximately $368 million remained available. The
Amendments also provided for an increase in the interest and facility fees under
the Credit Agreement.
SHAREHOLDER RIGHTS PLAN
On May 20, 1996, the Board of Directors of the Company declared a dividend
distribution of one right (a "Right") for each outstanding share of the
Company's Class A Common Stock and Class B Common Stock (collectively, the
"Common Stock"), to stockholders of record at the close of business on July 31,
1996 (the "Record Date"). The Board of Directors of the Company also authorized
the issuance of one Right for each share of Common Stock issued after the Record
Date and prior to the earliest of the Distribution Date (as defined below), the
redemption of the Rights and the expiration of the Rights, and in certain other
circumstances. Rights will attach to all Common Stock certificates representing
shares then outstanding and no separate Rights certificates will be distributed.
Subject to certain exceptions contained in the Rights Agreement dated as of
June 1, 1996 by and between the Company and Harris Trust and Savings Bank, as
Rights Agent (the "Rights Agreement"), the Rights will separate from the Common
Stock in the event any person acquires 15% or more of the outstanding Class A
Common Stock, the Board of Directors of the Company declares a holder of 10% or
more of the outstanding Class A Common Stock to be an "Adverse Person," or any
person commences a tender offer for 15% or more of the Class A Common Stock
(each event causing a "Distribution Date").
Except as set forth below and subject to adjustment as provided in the
Rights Agreement, each Right entitles its registered holder, upon the occurrence
of a Distribution Date, to purchase from the Company one one-thousandth of a
share of Series A Junior Participating Preferred Stock at a price of $170.00 per
one-thousandth share. However, in the event any person acquires or commences a
tender offer for 15% or more of the outstanding Class A Common Stock, or the
Board of Directors of the Company declares a holder of 10% or more of the
outstanding Class A Common Stock to be an "Adverse Person," the Rights (subject
to certain exceptions contained in the Rights Agreement) will instead become
exercisable for Class A Common Stock having a market value at such time equal to
$340.00. The Rights are redeemable under certain circumstances at $.01 per Right
and will expire, unless earlier redeemed, on July 31, 2006.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as Exhibit 99.1 to the Company's Registration Statement on
Form 8-A (File No. 001-12718). In connection with its execution of the Merger
Agreement for the merger transaction involving Foundation Health Corporation and
Health Systems International, Inc., the Company's predecessors, the Company
entered into Amendment No. 1 (the "Rights Amendment") to the Rights Agreement to
exempt the Merger Agreement and related transactions from triggering the Rights.
In addition, the Rights Amendment modifies certain terms of the Rights Agreement
applicable to the determination of certain "Adverse Persons," which
modifications became effective upon consummation of the transactions provided
for under the Merger Agreement. This summary description of the Rights does not
purport to be complete and is qualified in its entirely by reference to the
Rights Agreement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 4, 2000, the Company held its 2000 Annual Meeting of Stockholders
(the "Annual Meeting"). At the Annual Meeting, the Company's stockholders voted
upon proposals to (i) elect two directors for a term of three years ("Proposal
1"), (ii) ratify the selection of Deloitte & Touche LLP as the Company's
independent public accountants for the year ending December 31, 2000 ("Proposal
2") and (iii) approve the material terms of a new Executive Officer Incentive
Plan ("Proposal 3"). At the Annual Meeting, the Company's stockholders also
voted upon a stockholder proposal brought before the meeting which requested a
recommendation that the Company's Board of Directors amend the Company's
Certificate of Incorporation to declassify the Board of Directors ("Proposal
4"). The following provides voting information for all matters voted upon at the
Annual Meeting, and includes a separate tabulation with respect to each nominee
for director:
PROPOSAL 1
<TABLE>
<CAPTION>
ELECTION OF DIRECTORS VOTES FOR VOTES AGAINST VOTES WITHHELD BROKER NON-VOTES
--------------------- ----------- ------------- -------------- ----------------
<S> <C> <C> <C> <C>
George Deukmejian....... 110,422,367 0 2,397,104 0
Jay M. Gellert.......... 110,558,098 0 2,261,373 0
</TABLE>
As a result, each of Messrs. Deukmejian and Gellert were elected as a
Class I director for a three-year term at the Annual Meeting. Other directors
whose term of office as directors continued after the Annual Meeting were: J.
Thomas Bouchard, Thomas T. Farley, Patrick Foley, Roger Greaves, Richard W.
Hanselman, Richard J. Stegemeier and Raymond S. Troubh.
PROPOSAL 2
With respect to the ratification of the selection of Deloitte & Touche LLP
as the Company's independent public accountants for the year ending
December 31, 2000, 112,772,668 votes were cast in favor, 10,165 votes were cast
against and 36,638 votes were withheld for such proposal. There were no broker
non-votes for this proposal. Since this proposal received the affirmative vote
of a majority of the votes cast on the proposal, the selection of Deloitte &
Touche LLP as the Company's independent public accountants for the year ending
December 31, 2000 was ratified.
PROPOSAL 3
With respect to approval of the material terms of a new Executive Officer
Incentive Plan, 106,308,063 votes were cast in favor, 5,875,987 votes were cast
against and 635,421 votes were withheld for such proposal. There were no broker
non-votes for this proposal. Since this proposal received the affirmative vote
of a majority of the votes cast on the proposal, the material terms of the new
Executive Officer Incentive Plan were approved.
PROPOSAL 4
With respect to the stockholder proposal to recommend that the Board of
Directors amend the Company's Certificate of Incorporation to declassify the
Board of Directors, 78,606,645 votes were cast in favor, 11,854,388 votes were
cast against and 3,876,450 votes were withheld for such proposal. There were
18,481,988 broker non-votes for such proposal. 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 of Incorporation
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. Also, pursuant to the provisions of the Company's Certificate of
Incorporation, any such amendment would require the affirmative vote of at least
80 percent of the outstanding shares of Common Stock of the Company.
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<PAGE>
As a result of the foregoing, the votes cast in favor of this proposal serve
only as an advisory recommendation that the Board of Directors take steps to
amend the Company's Certificate of Incorporation accordingly. The Board of
Directors will consider how to proceed with the issues raised by this proposal
in connection with the Company's 2001 Annual Meeting of Stockholders. In total,
121,835,631 shares of Class A Common Stock were eligible to vote at the Annual
Meeting, 112,819,471 shares were voted at the Annual Meeting and 9,016,160
shares were unvoted at the Annual Meeting.
No other matters were submitted to a vote of the Company's security holders
during the quarter ended June 30, 2000.
ITEM 5. OTHER INFORMATION
RECENT DEVELOPMENTS
COLORADO OPERATIONS. In November 1999, the Company commenced the transition
of its membership in Colorado to PacifiCare of Colorado, Inc. ("PacifiCare-CO")
pursuant to a definitive agreement with PacifiCare-CO. Pursuant to such
agreement, PacifiCare-CO offered replacement coverage to substantially all of
the Company's Colorado HMO membership and PacifiCare Life Assurance Company
issued replacement indemnity coverage to substantially all of the Company's
Colorado POS membership. The transition of membership was completed in the
second quarter of 2000.
WASHINGTON OPERATIONS. In December 1999, the Company sold the capital stock
of QualMed Washington Health Plan, Inc., the Company's HMO subsidiary in the
state of Washington ("QM-Washington"), to American Family Care, Inc. ("AFC").
AFC assumed control of the health plan license and acquired the Medicaid and
Basic Health Plan membership of QM-Washington. The commercial HMO membership of
QM-Washington was transitioned to PacifiCare of Washington, Inc.
("PacifiCare-WA"), Premera Blue Cross and Blue Cross of Idaho pursuant to
definitive agreements with such companies. As part of such agreements,
PacifiCare-WA offered replacement coverage to QM-Washington's HMO and POS groups
in western Washington, Premera Blue Cross offered replacement coverage to
substantially all of QM-Washington's HMO and POS group membership in eastern
Washington and Blue Cross of Idaho offered replacement coverage for certain
members who reside in Idaho. The transition of membership was completed in the
second quarter of 2000.
OHIO, WEST VIRGINIA AND WESTERN PENNSYLVANIA OPERATIONS. The Company has
recently decided to exit the Ohio, West Virginia and Western Pennsylvania
markets in which it operates (the "OK/WV/WPA Markets"). In this connection, the
Company has provided notice of intention to withdraw from these service areas to
the appropriate regulators. The Company's withdrawal from the OK/WV/WPA Markets
will be effected at various times in late 2000 through early 2001. Following
completion of these withdrawal efforts, the Company will have no future
operations in such markets and intends to dissolve its subsidiaries operating in
such markets and recover any remaining capital.
MEDPARTNERS PROVIDER NETWORK, INC. On March 11, 1999, MedPartners Provider
Network, Inc. ("MPN"), a Knox-Keene licensed entity and a subsidiary of
MedPartners, Inc., a publicly-held physician practice and pharmacy benefit
management company (now known as Caremark Rx, Inc.) was placed into
conservatorship by the State of California under Section 1393(c) of the
California Health and Safety Code. The conservator immediately filed a petition
under Chapter 11 of the Bankruptcy Code on behalf of MPN. As of that date,
Health Net, the Company's California HMO subsidiary, had approximately 215,000
enrollees associated with MPN and its affiliated provider groups and clinics.
MedPartners, Inc., MPN and the State of California executed an Amended and
Restated Operations and Settlement Agreement dated as of June 16, 1999 (the "O&S
Agreement"), containing
28
<PAGE>
the basic principles for an orderly transition of the California operations of
MedPartners, Inc., and the resolution of unpaid provider claims. MPN filed with
the Bankruptcy Court its proposed Second Amended Chapter 11 Plan of
Reorganization (the "Plan") in early July 2000. The Plan implements the last
elements remaining to be resolved under the O&S Agreement. The confirmation
hearing regarding the Plan is scheduled to be heard by the Bankruptcy Court on
August 29, 2000. If the Plan is confirmed by the Bankruptcy Court and is
implemented by MPN, the Company believes that the bankruptcy of MPN will not
have a material adverse effect on the Company's California operations.
If the Plan is not confirmed and implemented, such failure could have a
material adverse effect on the Company's California operations because the
provider claims that would have been settled and resolved in the Plan will
remain unpaid.
California law is not fully settled on the ultimate liability of health
plans for unpaid provider claims where the health plan has already paid a
capitation payment to the bankrupt provider group that is intended to cover such
claims. The California Department of Corporations, which until July 1, 2000 had
been the state agency regulating health plans, had published an opinion holding
that health plans are not liable under such circumstances. In addition, the
California trial court with jurisdiction over a case filed on behalf of numerous
providers against several California health plans, including Health Net,
alleging health plan liability for unpaid claims under these circumstances, has
ruled in favor of the health plans on this issue at the pleading stage. However,
the issue has not been decided at an appellate level that would provide a
controlling definitive opinion on this subject. If health plans are ultimately
held liable for unpaid provider claims despite having previously made capitation
payments to provider groups intended to cover such claims, such a holding,
particularly in conjunction with a failure to confirm and implement the Plan as
set forth above, could have a material adverse effect on the Company's
operations and financial condition.
KPC ORGANIZATION. In August 1999, MPN sold the majority of its California
clinic operations to KPC Medical Management, Inc. (together with its affiliates,
"the KPC Organization"). The Company's California HMO subsidiary, Health Net,
had approximately 70,000 members whose health care was provided by these
operations as of July 1, 2000. The KPC Organization has significantly
restructured the operations it purchased from MPN, which it indicates is
reducing materially the recent operating losses of such operations. However, the
KPC Organization continues to incur losses and its financial viability is
unclear. Health Net, along with seven other health plans, continues to work with
the KPC Organization to assist it in strengthening its financial structure.
OTHER POTENTIAL DIVESTITURES
CERTAIN OTHER OPERATIONS. The Company continues to evaluate the
profitability realized or likely to be realized by its existing businesses and
operations, and is reviewing from a strategic standpoint which of such
businesses or operations should be divested. In this connection, the Company is
currently considering various expressions of interest it has received from third
parties regarding the potential divestiture of its Florida operations.
NEW VENTURES GROUP
The Company believes that the Internet and related new technologies will
fundamentally change managed care organizations. Accordingly, the Company has
created a New Ventures Group to focus on the strategic direction of the Company
in light of the Internet and related technologies and to pursue opportunities
consistent with such direction. Currently, the Company is developing
collaborative approaches with business partners to transform their existing
assets and expertise into new e-business opportunities. The Company believes
that net-enabled connectivity among purchasers, consumers, managed care
organizations, providers and other trading partners is a prerequisite to
creating and capturing e-business opportunities. The Company is currently
developing business concepts to take
29
<PAGE>
advantage of those market opportunities that provide value to consumers,
purchasers of benefits and the providers of medical and health care services.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The following exhibits are filed as part of this Quarterly Report on
Form 10-Q or are incorporated herein by reference:
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger, dated October 1, 1996, by and
among Health Systems International, Inc., FH Acquisition
Corp. and Foundation Health Corporation (filed as
Exhibit 2.5 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, which is incorporated
herein by reference).
2.2 Agreement and Plan of Merger, dated May 8, 1997, by and
among the Company, PHS Acquisition Corp. and Physicians
Health Services, Inc. (filed as Exhibit 2.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997, which is incorporated herein by reference).
2.3 Amendment No. 1 to Agreement and Plan of Merger, dated
October 20, 1997, by and among the Company, PHS Acquisition
Corp. and Physicians Health Services, Inc. (filed as
Exhibit 2.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997, which is
incorporated herein by reference).
3.1 Fourth Amended and Restated Certificate of Incorporation of
the Registrant (filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-8 (File No. 333-24621),
which is incorporated herein by reference).
3.2 Fifth Amended and Restated Bylaws of the Registrant (filed
as Exhibit 3.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, which is
incorporated herein by reference).
3.3 Certain Amendments to the Fifth Amended and Restated Bylaws
of the Registrant (filed as Exhibit 3.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, which is incorporated herein by
reference).
4.1 Form of Class A Common Stock Certificate (included as
Exhibit 4.2 to the Company's Registration Statements on
Forms S-1 and S-4 (File nos. 33-72892 and 33-72892-01,
respectively), which is incorporated herein by reference).
4.2 Form of Class B Common Stock Certificate (included as
Exhibit 4.3 to the Company's Registration Statements on
Forms S-1 and S-4 (File nos. 33-72892 and 33-72892-01,
respectively), which is incorporated herein by reference).
4.3 Rights Agreement dated as of June 1, 1996 by and between the
Company and Harris Trust and Savings Bank, as Rights Agent
(filed as Exhibit 99.1 to the Company's Registration
Statement on Form 8-A (File No. 001-12718), which is
incorporated herein by reference).
4.4 First Amendment to the Rights Agreement dated as of
October 1, 1996, by and between the Company and Harris Trust
and Savings Bank, as Rights Agent (filed as Exhibit 10.40 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, which is incorporated herein by
reference).
10.1 Employment Letter Agreement between the Company and Karin D.
Mayhew dated January 22, 1999 (filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999, which is incorporated herein by
reference).
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10.2 Letter Agreement between B. Curtis Westen and the Company
dated June 25, 1998 (filed as Exhibit 10.73 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998, which is incorporated herein by reference).
10.3 Employment Letter Agreement dated July 3, 1996 between Jay
M. Gellert and the Company (filed as Exhibit 10.37 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996, which is incorporated herein by
reference).
10.4 Amended Letter Agreement between the Company and Jay M.
Gellert dated as of August 22, 1997 (filed as
Exhibit 10.69 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, which is incorporated
herein by reference).
*10.5 Letter Agreement between the Company and Jay M. Gellert
dated as of March 2, 2000, a copy of which is filed
herewith.
10.6 Employment Letter Agreement between the Company and Jeffrey
J. Bairstow dated as of January 29, 1998 (filed as
Exhibit 10.5 to the Company's Quarterly Report on Form 10Q
for the quarter ended March 31, 2000, which is incorporated
herein by reference).
10.7 Employment Letter Agreement between the Company and Steven
P. Erwin dated March 11, 1998 (filed as Exhibit 10.72 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, which is incorporated herein by
reference).
10.8 Employment Agreement between the Company and Maurice Costa
dated December 31, 1997 (filed as Exhibit 10.71 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997, which is incorporated herein by
reference).
10.9 Employment Letter Agreement between the Company and Gary S.
Velasquez dated May 1, 1996 (filed as Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998, which is incorporated herein by
reference).
10.10 Employment Letter Agreement between the Company and Cora
Tellez dated November 16, 1998 (filed as Exhibit 10.16 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, which is incorporated herein by
reference).
10.11 Employment Letter Agreement between the Company and Karen
Coughlin dated March 12, 1999 (filed as Exhibit 10.17 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, which is incorporated herein by
reference).
10.12 Form of Severance Payment Agreement dated December 4, 1998
by and between the Company and various of its executive
officers (filed as Exhibit 10.21 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998,
which is incorporated herein by reference).
10.13 Severance Payment Agreement between the Company and Maurice
Costa dated April 6, 1998 (filed as Exhibit 10.24 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998, which is incorporated herein by
reference).
10.14 The Company's Deferred Compensation Plan effective as of
May 1, 1998 (filed as Exhibit 10.66 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998,
which is incorporated herein by reference).
10.15 The Company's Deferred Compensation Plan Trust Agreement
dated as of September 1, 1998 between the Company and Union
Bank of California (filed as Exhibit 10.31 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1998, which is incorporated herein by reference).
10.16 The Company's Second Amended and Restated 1991 Stock Option
Plan (filed as Exhibit 10.30 to Registration Statement on
Form S-4 (File No. 33-86524), which is incorporated herein
by reference).
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10.17 The Company's 1997 Stock Option Plan (filed as
Exhibit 10.45 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, which is
incorporated herein by reference).
*10.18 The Company's Amended and Restated 1998 Stock Option Plan, a
copy of which is filed herewith.
10.19 The Company's 1995 Stock Appreciation Right Plan (filed as
Exhibit 10.12 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995, which is
incorporated herein by reference). 1
10.20 The Company's Second Amended and Restated Non-Employee
Director Stock Option Plan filed as Exhibit 10.31 to
Registration Statement on Form S-4 (File No. 33-86524),
which is incorporated herein by reference).
10.21 The Company's Third Amended and Restated Non-Employee
Director Stock Option Plan (filed as Exhibit 10.46 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997, which is incorporated herein by
reference).
10.22 The Company's Employee Stock Purchase Plan (filed as
Exhibit 10.33 to the Company's Registration Statements on
Forms S-1 and S-4 (File nos. 33-72892 and 33-72892-01,
respectively), which is incorporated herein by reference).
10.23 The Company's Employee Stock Purchase Plan (filed as
Exhibit 10.47 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, which is
incorporated herein by reference).
10.24 The Company's Performance-Based Annual Bonus Plan (filed as
Exhibit 10.48 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, which is
incorporated herein by reference).
10.25 The Company's 401(k) Associate Savings Plan (filed as
Exhibit 4.5 to the Company's Registration Statement on
Form S-8 filed on March 31, 1998, which is incorporated
herein by reference).
10.26 The Company's Supplemental Executive Retirement Plan
effective as of January 1, 1996 (filed as Exhibit 10.65 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, which is incorporated herein by
reference).
10.27 Managed Health Network, Inc. Incentive Stock Option Plan
(filed as Exhibit 4.8 to the Company's Registration
Statement on Form S-8 (File No. 333-24621), which is
incorporated herein by reference).
10.28 Managed Health Network, Inc. Amended and Restated 1991 Stock
Option Plan (filed as Exhibit 4.9 to the Company's
Registration Statement on Form S-8 (File No. 333-24621),
which is incorporated herein by reference).
10.29 Foundation Health Corporation 1990 Stock Option Plan (filed
as Exhibit 4.5 to the Company's Registration Statement on
Form S-8 (File No. 333-24621), which is incorporated herein
by reference).
10.30 FHC Directors Retirement Plan (filed as an exhibit to FHC's
Annual Report on Form 10-K for the year ended June 30, 1994
filed with the Commission on September 24, 1994, which is
incorporated herein by reference).
10.31 FHC's Deferred Compensation Plan, as amended and restated
(filed as Exhibit 10.99 to FHC's Annual Report on Form 10-K
for the year ended June 30, 1995, filed with the Commission
on September 27, 1995, which is incorporated herein by
reference).
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10.32 FHC's Supplemental Executive Retirement Plan, as amended and
restated (filed as Exhibit 10.100 to FHC's Annual Report on
Form 10-K for the year ended June 30, 1995, filed with the
Commission on September 27, 1995, which is incorporated
herein by reference).
10.33 FHC's Executive Retiree Medical Plan, as amended and
restated (filed as Exhibit 10.101 to FHC's Annual Report on
Form 10-K for the year ended June 30, 1995, filed with the
Commission on September 27, 1995, which is incorporated
herein by reference).
10.34 Stock and Note Purchase Agreement by and between FHC,
Jonathan H., Scheff, M.D., FPA Medical Management, Inc., FPA
Medical Management of California, Inc. and FPA Independent
Practice Association dated as of June 28, 1996 (filed as
Exhibit 10.109 to FHC's Annual Report on Form 10-K for the
year ended June 30, 1996, which is incorporated herein by
reference).
10.35 Participation Agreement dated as of May 25, 1995 among
Foundation Health Medical Services, as Construction Agent
and Lessee, FHC, as Guarantor, First Security Bank of Utah,
N.A., as Owner Trustee, Sumitomo Bank Leasing and
Finance, Inc., The Bank of Nova Scotia and NationsBank of
Texas, N.A., as Holders and NationsBank of Texas, N.A., as
Administrative Agent for the Lenders; and Guaranty Agreement
dated as of May 25, 1995 by FHC for the benefit of First
Security Bank of Utah, N.A. (filed as an exhibit to FHC's
Form 10-K for the year ended June 30, 1995, filed with the
Commission on September 27, 1995, which is incorporated
herein by reference).
10.36 Credit Agreement dated July 8, 1997 among the Company, the
banks identified therein and Bank of America National Trust
and Savings Association in its capacity as Administrative
Agent (providing for an unsecured $1.5 billion revolving
credit facility) (filed as Exhibit 10.23 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997, which is incorporated herein by reference).
10.37 Guarantee Agreement dated July 8, 1997 between the Company
and First Security Bank, National Association (filed as
Exhibit 10.24 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997, which
is incorporated herein by reference).
10.38 First Amendment and Waiver to Credit Agreement dated
April 6, 1998 among the Company, Bank of America National
Trust and Savings Association and the Banks (as defined
therein) (filed as Exhibit 10.64 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998,
which is incorporated herein by reference).
10.39 Second Amendment to Credit Agreement dated July 31, 1998
among the Company, Bank of America National Trust and
Savings Association and the Banks (as defined therein)
(filed as Exhibit 10.65 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998, which is
incorporated herein by reference).
10.40 Third Amendment to Credit Agreement, dated November 6, 1998,
among the Company, Bank of America National Trust and
Savings Association and the Banks (as defined therein)
(filed as Exhibit 10.65 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998, which is
incorporated herein by reference).
10.41 Fourth Amendment to Credit Agreement, dated as of March 26,
1999, among the Company, Bank of America National Trust and
Savings Association and the Banks, as defined therein (filed
as Exhibit 10.64 to the Company's Form 10-K for the year
ended December 31, 1998, which is incorporated herein by
reference).
10.42 Form of Credit Facility Commitment Letter, dated March 27,
1998, between the Company and the Majority Banks (as defined
therein) (filed as Exhibit 10.70 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997,
which is incorporated herein by reference).
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10.43 Office Lease, dated as of January 1, 1992, by and between
Warner Properties III and Health Net (filed as
Exhibit 10.23 to the Company's Registration Statements on
Forms S-1 and S-4 (File Nos. 33-72892 and 33-72892-01,
respectively), which is incorporated herein by reference).
10.44 Lease Agreement between HAS-First Associates and FHC dated
August 1, 1988 and form of amendment thereto (filed as an
exhibit to FHC's Registration Statement on Form S-1 (File
No. 33-34963), which is incorporated herein by reference).
10.45 Asset Purchase Agreement dated December 31, 1998 by and
between the Company and Access Health, Inc. (filed as
Exhibit 10.62 to the Company's Form 10-K for the year ended
December 31, 1998, which is incorporated herein by
reference).
10.46 Purchase Agreement dated February 26, 1999 by and among the
Company, Foundation Health Pharmaceutical Services, Inc.,
Integrated Pharmaceutical Services, Inc., and Advance
Paradigm, Inc. (filed as Exhibit 10.63 to the Company's
Form 10-K for the year ended December 31, 1998, which is
incorporated herein by reference).
11.1 Statement relative to computation of per share earnings of
the Company (included in the Notes to the Condensed
Consolidated Financial Statements contained in this
Quarterly Report on Form 10-Q.)
*27.1 Financial Data Schedule for the second quarter ended
June 30, 2000, a copy of which has been filed with the EDGAR
version of this filing.
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* A copy of the exhibit is being filed with this Quarterly Report on
Form 10-Q.
(B) REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed by the Company during the second
quarterly period ended June 30, 2000.
34
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
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FOUNDATION HEALTH SYSTEMS, INC.
(REGISTRANT)
Date: August 14, 2000 By: /s/ JAY M. GELLERT
-----------------------------------------
Jay M. Gellert
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: August 14, 2000 By: /s/ STEVEN P. ERWIN
-----------------------------------------
Steven P. Erwin
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</TABLE>
35
