10-K

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2000

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                TO                

COMMISSION FILE NUMBER: 1-12718

HEALTH NET, INC.
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE (State or Other Jurisdiction of Incorporation or Organization)	95-4288333 (I.R.S. Employer Identification No.)
21650 OXNARD STREET, WOODLAND HILLS, CA (Address of Principal Executive Offices)	91367 (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 676-6000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

TITLE OF EACH CLASS	NAME OF EACH EXCHANGE ON WHICH REGISTERED
Class A Common Stock, $.001 par value	New York Stock Exchange, Inc.

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

    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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / /

    The aggregate market value of the voting stock held by non-affiliates of the registrant at March 7, 2001 was $2,192,398,122 (which represents 104,003,706 shares of Class A Common Stock held by such non-affiliates multiplied by $21.08, the closing sales price of such stock on the New York Stock Exchange on March 7, 2001).

    The number of shares outstanding of the registrant's Class A Common Stock as of March 7, 2001 was 122,864,574 (excluding 3,194,374 shares held as treasury stock).

DOCUMENTS INCORPORATED BY REFERENCE

    Part II of this Form 10-K incorporates by reference certain information from the registrant's Annual Report to Stockholders for the year ended December 31, 2000 ("Annual Report to Stockholders"). Part III of this Form 10-K incorporates by reference certain information from the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the close of the year ended December 31, 2000.

PART I

ITEM 1. BUSINESS

    Health Net, Inc. (the "Company" or "HNT") is an integrated managed care organization which administers the delivery of managed health care services. The Company's health maintenance organizations ("HMOs"), insured preferred provider organizations ("PPOs") and government contracts subsidiaries provide health benefits to approximately 5.5 million individuals in 16 states through group, individual, Medicare, Medicaid and TRICARE programs. The Company's subsidiaries also offer managed health care products related to behavioral health, dental, vision and prescription drugs, and offer managed health care product coordination for multi-region employers and administrative services for medical groups and self-funded benefits programs. The Company operates and conducts its HMO and other businesses through its subsidiaries.

    The Company currently operates within two segments: Health Plan Services and Government Contracts/Specialty Services. The Health Plan Services segment consists of two regional divisions: the Western Division (Arizona, California and Oregon) and the Eastern Division (Connecticut, Florida, New Jersey, New York and Pennsylvania). In January, 2001, the Company entered into a definitive agreement to sell its Florida health plan, which sale is subject to regulatory approvals and other customary closing conditions. In 2000, the Company's Eastern Division also included health plan operations in Ohio, West Virginia and Western Pennsylvania ("OH/WV/WPA"). In such year, the Company decided to exit the OH/WV/WPA markets. In this connection, the Company provided notice of its intention to withdraw from these service areas to the appropriate regulators. As of February, 2001, the Company no longer had any members in the OH/WV/WPA markets. In 1999, the Company entered into certain arrangements to transition the membership of its health plans in the states of Colorado, Idaho and Washington. The Company completed such transitions in the second quarter of 2000. The Company is one of the largest managed health care companies in the United States, with approximately 4.0 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 35 states and the District of Columbia.

    The Company's HMOs market traditional HMO products to employer groups and Medicare and Medicaid products to employer groups and directly to individuals. Health care services that are provided to the Company's commercial and individual members include primary and specialty physician care, hospital care, laboratory and radiology services, prescription drugs, dental and vision care, skilled nursing care, physical therapy and mental health services. The Company's HMO service networks include approximately 50,500 primary care physicians and 109,000 specialists.

    The Company's Government Contracts/Specialty Services segment consists of the Government Contracts Division and the Specialty Services Division. The Company's Government Contracts Division oversees the provision of contractual services to federal government programs such as TRICARE. The Company receives revenues for administrative and management services and, under most of its contracts, also accepts financial responsibility for a portion of the health care costs. The Company's Specialty Services Division oversees the provision of supplemental programs to enrollees in the Company's HMOs, as well as to members whose basic medical coverage is provided by non-HNT companies, including vision coverage, dental coverage, managed behavioral health programs and a prescription drug program. The Specialty Services Division consists of both operations in which the Company assumes underwriting risk in return for premium revenue, and operations in which the Company provides administrative services only, including certain of the behavioral health and pharmacy benefit management programs. Such Division also provides certain bill review and third party administrative services as described elsewhere in this Annual Report.

    The Company continues to evaluate the profitability realized or likely to be realized by its existing businesses and operations, and the opportunities to expand its businesses in profitable markets. In

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January, 2001, the Company entered into a definitive agreement to sell its Florida health plan, which sale is subject to regulatory approvals and other customary closing conditions. In 2000, the Company decided to exit the Ohio, West Virginia and Western Pennsylvania markets and provided notice of its intention to withdraw from such service areas to the appropriate regulators. As of February, 2001, the Company no longer had any members in such markets. See "Divestitures."

    The Company was incorporated in 1990. The current operations of the Company are the result of the April 1, 1997 merger transaction (the "FHS Combination") involving Health Systems International, Inc. ("HSI") and Foundation Health Corporation ("FHC"). Pursuant to the Agreement and Plan of Merger (the "Merger Agreement") that evidenced the FHS Combination, FH Acquisition Corp., a wholly-owned subsidiary of HSI, merged with and into FHC and FHC survived as a wholly-owned subsidiary of HSI, which changed its name to Foundation Health Systems, Inc. In November, 2000, the Company changed its name from Foundation Health Systems, Inc. to Health Net, Inc.

    The FHS Combination was accounted for as a pooling of interests for accounting and financial reporting purposes. The pooling of interests method of accounting is intended to present, as a single interest, two or more common stockholder interests which were previously independent and assumes that the combining companies have been merged from inception. Consequently, the Company's consolidated financial statements incorporated by reference into this Annual Report on Form 10-K have been prepared and/or restated as though HSI and FHC always had been combined on a calendar year basis.

    Prior to the FHS Combination, the Company was the successor to the business conducted by Health Net of California, Inc., now the Company's HMO subsidiary in California, which became a subsidiary of the Company in 1992, and HMO and PPO networks operated by QualMed, Inc. ("QualMed"), which combined with the Company in 1994 to create HSI. FHC was incorporated in Delaware in 1984. The executive offices of the Company are located at 21650 Oxnard Street, Woodland Hills, CA 91367. Except as the context otherwise requires, the term "Company" refers to HNT and its subsidiaries.

HEALTH PLAN DIVISIONS

    HMO AND PPO OPERATIONS.  The Company's HMOs offer members a comprehensive range of health care services, including ambulatory and outpatient physician care, hospital care, pharmacy services, eye care, behavioral health and ancillary diagnostic and therapeutic services. The Company offers a full spectrum of managed health care products.

    The integrated health care programs offered by the Company's HMOs include products offered through both traditional Network Model HMOs (in which the HMOs contract with individual physicians, physician groups and independent or individual practice associations ("IPAs")) and IPA Model HMOs (in which the HMOs contract with one or more IPAs that in turn subcontract with individual physicians to provide HMO patient services) which offer quality care, cost containment and comprehensive coverage; a matrix package which allows employees to select their desired coverage from alternatives that have interchangeable outpatient and inpatient co-payment levels; point-of-service ("POS") programs which offer a multi-tier design that provides both conventional HMO and indemnity-like (in-network and out-of-network) tiers; a PPO-like tier which allows members to self-refer to the network physician of their choice; and a managed indemnity plan which is provided for employees who reside outside of their HMO service areas.

    The Company's strategy is to offer to employers a wide range of managed health care products and services that provide quality care, encourage wellness and assist in containing health care costs. The pricing of the products offered is designed to provide incentives to both employers and employees to select and enroll in the products with greater managed health care and cost containment elements. In general, the Company's HMO subsidiaries provide comprehensive health care coverage for a fixed fee or premium that does not vary with the extent or frequency of medical services actually received by

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the member. PPO enrollees choose their medical care from among the various contracting providers or choose a non-contracting provider and are reimbursed on a traditional indemnity plan basis after reaching an annual deductible. POS enrollees choose, each time they receive care, from conventional HMO or indemnity-like (in-network and out-of-network) coverage, with payments and/or reimbursement depending on the coverage chosen. The Company assumes both underwriting and administrative expense risk in return for the premium revenue it receives from its HMO, POS and PPO products. The Company's subsidiaries have contractual relationships with health care providers for the delivery of health care to the Company's enrollees. While a majority of the Company's members are covered by conventional HMO products, the Company is continuing to expand its other product lines, thereby enabling it to offer flexibility to an employer and to tailor its products to an employer's particular needs.

    The following table contains certain information relating to the Company's HMO and PPO members, POS members, Medicare members and Medicaid members as of December 31, 2000:

	WESTERN DIVISION	EASTERN DIVISION
Commercial HMO and PPO Members	1,719,980	977,200
POS Members	267,786	257,035	(a)
Medicare Members (risk only)	183,851	87,956
Medicaid Members	535,709	130,668

(a)

Includes 253,734 members under the Company's arrangement with The Guardian described elsewhere in this Annual Report on Form 10-K.

    In addition, the following sets forth certain data regarding the Company's employer groups in the commercial managed care operations of its Health Plan Divisions as of December 31, 2000:

Number of Employer Groups	51,667
Largest Employer Group as % of enrollment	11.0	%
10 largest Employer Groups as % of enrollment	27.0	%

WESTERN DIVISION

    During 2000, the Western Division included Company operations in Arizona, California and Oregon.

    In Arizona, the Company believes that its commercial managed care operations rank it second largest as measured by total membership and sixth by size of provider network. The Company's commercial HMO membership in Arizona was 289,713 as of December 31, 2000, which represented an increase of approximately 2% during 2000. The Company's Medicare membership in Arizona was 61,231 as of December 31, 2000, which represented an increase of approximately 8% during 2000.

    The California market is characterized by a concentrated population. Health Net of California, Inc., the Company's California HMO, is believed by the Company to be the fourth largest HMO in the state of California in terms of membership and the second largest in terms of size of provider network. The Company's commercial HMO membership in California as of December 31, 2000 was 1,326,685, which represented a decrease of approximately 4% during 2000. The decrease in commercial HMO membership was due, in part, to the Company's pricing discipline and its focus on profitable accounts. The Company's Medicare membership in California as of December 31, 2000 was 142,666, which represented an increase of approximately 15% during 2000. The Company's Medicaid membership in California as of December 31, 2000 was 535,709 members, an increase of approximately 7% during 2000. Health Net's California HMO, which currently serves about 240,000 members of the California Public Employees' Retirement System ("CalPERS") representing approximately 5.1% of the

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Company's consolidated health plan service premiums, has been requested to file a revised bid to renew its contract to serve CalPERS enrollees for 2002. This revised bid was submitted on March 23, 2001 and it is anticipated that CalPERS will make a determination on Health Net's revised bid in mid-April 2001. There can be no assurances that CalPERS will accept the revised bid. In the event that the business is not renewed, management of the Company believes that the effect on the overall financial performance of Health Net would be immaterial.

    The Company believes that its Oregon HMO and PPO operations make it the eighth largest HMO managed care provider in terms of membership and second largest HMO in terms of size of provider network. The Company's commercial HMO and PPO membership in Oregon was 58,914 as of December 31, 2000, which represented a decrease of approximately 41% during 2000. The decrease was due, in part, to the Company's pricing discipline and its focus on profitable accounts, the Company's withdrawal from certain counties in central and southern Oregon, and an increase in member selection of POS products.

EASTERN DIVISION

    During 2000, the Eastern Division included Company operations in Connecticut, Florida, New Jersey, New York, Ohio, Pennsylvania and West Virginia.

    In Connecticut, New Jersey and New York, the Company markets mid-size and large employer group commercial HMO, Medicare and Medicaid products directly. However, for small employer group business in Connecticut, New Jersey and New York, the Company and The Guardian Life Insurance Company of America ("The Guardian") together offer both HMO and POS products through a joint venture doing business as "Healthcare Solutions." In general, the Company and The Guardian share equally in the profits of the joint venture, subject to certain terms of the joint venture arrangement related to expenses. The Guardian is a mutual insurer (owned by its policy owners) which offers financial products and services, including individual life and disability income insurance, employee benefits, pensions and 401(k) products. The Guardian is headquartered in New York and has almost 2,400 financial representatives in 119 general agencies.

    The Company believes its Connecticut HMO and PPO operations make it the largest HMO managed care provider in terms of membership and the largest in terms of size of provider network in the state of Connecticut. The Company's commercial HMO membership in Connecticut was 361,886 as of December 31, 2000 (including 58,297 members under The Guardian arrangement), an increase of approximately 7% since the end of 1999. The Company's Medicare membership in Connecticut was 24,461 as of December 31, 2000, which represented a decrease of approximately 10% during 2000, and the Company's Medicaid membership in Connecticut was 80,310 as of December 31, 2000, which represented an increase of approximately 8% during 2000. The decrease in Medicare membership was due, in part, to the Company's pricing discipline and its focus on profitable accounts.

    The Company believes its Florida HMO and PPO operations make it the eighth largest HMO managed care provider in terms of membership and third largest HMO in terms of size of provider network in the state of Florida. The Company's commercial HMO membership in Florida was 96,302 as of December 31, 2000, which represented an increase of approximately 9% during 2000. The Company's Medicare membership in Florida was 46,075 as of December 31, 2000, which represented an increase of approximately 59% during 2000. The Company's Medicaid membership in Florida was 24,108 as of December 31, 2000, which represented an increase of approximately 32% in 2000. In January, 2001, the Company entered into a definitive agreement to sell its Florida operations, which sale is subject to certain regulatory approvals and other customary closing conditions. See "Divestitures."

    The Company believes its New Jersey HMO and PPO operations make it the third largest HMO managed care provider in terms of membership and the third largest in terms of size of provider network in the state of New Jersey. The Company's commercial HMO membership in New Jersey was

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205,394 as of December 31, 2000 (including 86,689 members under The Guardian arrangement), a decrease of approximately 5% since the end of 1999. The Company did not have any Medicare membership in New Jersey as of December 31, 2000. The Company had 1,897 Medicare members in New Jersey as of December 31, 1999. The Company's Medicaid membership in New Jersey was 26,250 as of December 31, 2000, which represented an increase of approximately 2% during 2000. The decreases in commercial HMO and Medicare membership were due, in part, to the Company's pricing discipline and its focus on profitable accounts.

    In New York, the Company had 257,167 commercial HMO members as of December 31, 2000, which represented an increase of approximately 13% during 2000. Such membership included 108,748 members under The Guardian arrangement. The Company believes its New York HMO and PPO operations make it the third largest HMO managed care provider in terms of membership and the third largest in terms of size of provider network in the state of New York. The Company's Medicare membership in New York was 6,005 as of December 31, 2000. The Company did not have any Medicare membership in New York at the end of 1999.

    The Company's commercial HMO membership in eastern Pennsylvania was 44,944 as of December 31, 2000, which represented an increase of approximately 8% during 2000. The Company's Medicare membership in eastern Pennsylvania was 11,415 as of December 31, 2000, which represented a decrease of approximately 15% during 2000. The decrease in Medicare membership was due, in part, to the Company's pricing discipline and its focus on profitable accounts. During 2000, the Company decided to exit the Ohio, West Virginia and Western Pennsylvania markets. As of February, 2001, the Company no longer had any members in such markets.

    MEDICARE.  The Company's Medicare+ Choice plans in the Eastern and Western Divisions as of December 31, 2000 had a combined membership of approximately 271,807, compared to 265,751 as of December 31, 1999. The Company offers its Medicare+ Choice products directly to individuals and to employer groups. To enroll in a Company Medicare+ Choice plan, covered persons must be eligible for Medicare. Health care services normally covered by Medicare are provided or arranged by the Company, in conjunction with a broad range of preventive health care services. The federal Health Care Financing Administration ("HCFA") pays the Company a monthly amount for each enrolled member based, in part, upon the "Adjusted Average Per Capita Cost," as determined by HCFA's analysis of fee-for-service costs related to beneficiary demographics. Depending on plan design and other factors, the Company may charge a monthly premium.

    The Company's California Medicare+ Choice product, Seniority Plus, was licensed and certified to operate in 20 California counties as of December 31, 2000. The Company's other HMOs are licensed and certified to offer Medicare+ Choice plans in 11 counties in Pennsylvania, 5 counties in Connecticut, 6 counties in Arizona, 3 counties in Florida and 7 counties in New York. The Company withdrew from certain Medicare counties in 2000 due, in part, to the fact that government reimbursement payments for such counties had been increasing at a much lower level than costs of care.

    MEDICAID PRODUCTS.  As of December 31, 2000, the Company had an aggregate of approximately 666,377 Medicaid members, principally in California. To enroll in these Medicaid products, an individual must be eligible for Medicaid benefits under the appropriate state regulatory requirements. The respective HMOs offer, in addition to standard Medicaid coverage, certain additional services including dental and vision benefits. The applicable state agency pays the Company's HMOs a monthly fee for each Medicaid member enrolled on a percentage of fee-for-service costs. As of December 31, 2000, the Company had Medicaid members and operations in California, Connecticut, Florida and New Jersey.

    ADMINISTRATIVE SERVICES ONLY ("ASO") BUSINESS.  The Company also provides third-party administrative services to large employer groups in Arizona, Connecticut, New Jersey, New York

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and Pennsylvania. Under these arrangements, the Company provides claims processing, customer service, medical management and other administrative services without assuming the risk for medical costs. The Company is generally compensated for these services on a fixed per member per month basis. As of December 31, 2000, the Company serviced 82,957 members through its ASO business.

    INDEMNITY INSURANCE PRODUCTS.  The Company offers insured PPO, POS and indemnity products as "stand-alone" products and as part of multiple option products in various markets. These products are offered by the Company's health and life insurance subsidiaries which are licensed to sell insurance in 35 states and the District of Columbia. Through these subsidiaries, the Company also offers HMO members certain auxiliary non-health products such as group life and accidental death and disability insurance.

    The Company's health and life insurance products are provided throughout most of the Company's service areas. The following table contains certain information relating to such health and life insurance companies' insured PPO, POS, indemnity and group life products as of December 31, 2000:

	WESTERN DIVISION(a)	EASTERN DIVISION
Insured PPO Members	65,472	11,507
Point of Service Members	267,786	257,035	(b)
Indemnity Members	10,032	152
Group Life Members	9,426	—

(a)

Includes members in states covered by the Company's former Central Division.

(b)

Includes 253,734 members under the Company's arrangement with The Guardian described elsewhere in this Annual Report on Form 10-K.

GOVERNMENT CONTRACTS DIVISION

    TRICARE.  The Company's wholly-owned subsidiary, Health Net Federal Services, Inc. ("Federal Services") (formerly known as Foundation Health Federal Services, Inc.), administers large, multi-year managed care federal contracts with the United States Department of Defense ("DoD").

    Federal Services currently administers health care contracts for DoD's TRICARE program covering approximately 1.5 million eligible individuals under TRICARE. Through the federal government's TRICARE program, Federal Services provides TRICARE-eligible beneficiaries with improved access to care, lower out-of-pocket expenses and fewer claims forms. Federal Services currently administers three TRICARE contracts for five regions that cover the following states:

•

Region 11: Washington, Oregon and part of Idaho

•

Region 6: Arkansas, Oklahoma, most of Texas, and most of Louisiana

•

Regions 9, 10 and 12: California, Hawaii, Alaska and part of Arizona

    During 2000, enrollment of TRICARE beneficiaries in the HMO option (called "TRICARE Prime") of the TRICARE program for the Region 11 contract increased by 3% to 139,825 while the total estimated number of eligible beneficiaries, based on DoD data, decreased by 2% to 243,266. During 2000, enrollment of TRICARE beneficiaries in TRICARE Prime for the Region 6 contract increased by 5% to 382,680 while the total estimated number of eligible beneficiaries, based on DoD data, decreased by less than 1% to 611,948. During 2000, enrollment of TRICARE beneficiaries in TRICARE Prime for the Regions 9, 10 and 12 contract increased by 8% to 378,945 while the total estimated number of eligible beneficiaries, based on DoD data and excluding Alaska, decreased by 4% to 608,105. DoD estimated numbers of eligible beneficiaries are subject to revision when actual numbers become available.

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    Under the TRICARE contracts, Federal Services shares health care cost risk with DoD for both gains and losses. Federal Services subcontracts to affiliated and unrelated third parties for the administration and health care risk of parts of these contracts. If all option periods are exercised by DoD and no further extensions of the performance period are made, health care delivery ends on October 31, 2002 for the Region 6 contract, on March 31, 2003 for the Regions 9, 10 and 12 contract, and February 28, 2002 for the Region 11 contract. The DoD Authorization Act for government fiscal year 2001 authorized DoD to extend the term of the current TRICARE contracts for an additional two years. Federal Services and DoD have not discussed the modifications to the contracts for the additional two-year extension. However, if the additional two-year extension is added to the three contracts and all option periods are exercised, the period of health care delivery would extend to February 29, 2004 for the Region 11 contract, October 31, 2004 for the Region 6 contract and March 31, 2005 for the Regions 9, 10 and 12 contract. Federal Services also expects to compete for the rebid of those contracts.

    In September, 2000, Federal Services and DoD agreed to settle Federal Services' litigation of the award of the TRICARE contract for Regions 2 and 5 to a competitor of Federal Services, the claim of Federal Services' for bid and proposal costs under the procurement for Regions 2 and 5, and the administrative close-out of the completed contract for New Orleans and Base Realignment and Closure (BRAC) sites.

    In December, 2000, Federal Services and DoD agreed to a settlement of approximately $389 million for outstanding receivables related to Federal Services' three current contracts for DoD's TRICARE program and for the completed contract for the CHAMPUS (Civilian Health and Medical Program of the Uniformed Services) Reform Initiative. Approximately $60 million of the settlement amount was received in December, 2000. Federal Services received the remainder of the settlement in January, 2001. The settlement amounts will be used, among other things, to pay vendors, providers and amounts owed back to the government, and will be applied to the continuing operating needs of the three TRICARE contracts. The settlement agreement also provides for additional payments during 2001 and 2002 for costs that have not yet been incurred.

    VETERANS AFFAIRS.  During 2000, Federal Services administered 12 contracts with the U.S. Department of Veterans Affairs to manage Community Based Outpatient Clinics in 6 states. Federal services also manages 28 contracts with the U.S. Department of Veterans Affairs for claims re-pricing services.

SPECIALTY SERVICES DIVISION

    The Company's Specialty Services Division offers behavioral health, dental, vision and pharmacy benefit management products and services as well as managed care products related to bill review, administration and cost containment for hospitals, health plans and other entities.

    DENTAL AND VISION.  Through DentiCare of California, Inc. ("DentiCare"), the Company operates a dental HMO in California and Hawaii and performs dental administrative services for an affiliate company in California, serving in the aggregate approximately 487,000 enrollees as of December 31, 2000. This enrollment includes 109,006 enrollees who are beneficiaries under Medicaid dental programs, of which 30,780 enrollees are beneficiaries of Hawaii's Medicaid program. DentiCare is also a participant in California's Healthy Families Program, serving 72,063 members. Acquired by the Company in 1991, DentiCare has grown from total revenues in 1992 of $24 million to approximately $49 million for the year ended December 31, 2000.

    Operating on administrative and information system platforms in common with DentiCare is Foundation Health Vision Services, Inc., d.b.a. AVP Vision Services ("AVP"). AVP operates in California and Arizona and provides at-risk and administrative services under various programs that result in the delivery of vision benefits to over 583,000 enrollees. Total revenues from AVP operations

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for the year ended December 31, 2000 were approximately $9 million. Since its acquisition by the Company in 1992, AVP has grown from 30,000 covered enrollees to approximately 318,000 enrollees in full-risk products and 265,000 enrollees covered under administrative services contracts as of December 31, 2000.

    Both DentiCare and AVP are licensed in California under the Knox-Keene Health Care Service Plan Act of 1975, as amended (the "Knox-Keene Act"), as Specialized Health Care Service Plans, and compete with other HMOs, traditional insurance companies, self-funded plans, PPOs and discounted fee-for-service plans. The two companies share a common strategy to maximize the value and quality of managed dental and vision care services while appropriately balancing financial risk assumption among providers, enrollees and other entities to achieve the effective and efficient use of available resources.

    BEHAVIORAL HEALTH.  The Company provides behavioral health services through a subsidiary, Managed Health Network, Inc., and subsidiaries of Managed Health Network, Inc. (collectively "MHN"). MHN holds a license in California under the Knox-Keene Act as a Specialized Health Care Service Plan. MHN offers behavioral health, substance abuse and employee assistance programs ("EAPs") on an insured and self-funded basis to employers, governmental entities and other payors in various states.

    MHN provides managed behavioral health programs to employers, governmental agencies and public entitlement programs, such as TRICARE and Medicare. Employer group sizes range from Fortune 100 to mid-sized companies with 200 employees. MHN's strategy is to extend its market share in the Fortune 500, health plan and TRICARE markets through a combination of direct, consultant/broker and affiliate sales. MHN intends to achieve additional market share through broadening its employer products, including using the Internet as a distribution channel, pursuing upcoming TRICARE procurement opportunities with Federal Services and continuing carve-out product sales, funded on either a risk or administrative-services-only ("ASO") basis.

    MHN's products and services were being provided to over 9.4 million individuals as of December 31, 2000, with approximately 3.0 million individuals under risk-based programs, approximately 2.5 million individuals under self-funded programs and approximately 3.9 million individuals under EAP programs.

    In 2000, these products and services generated revenues of approximately $270 million, of which approximately $200 million derived from risk-based programs, including approximately $99 million from TRICARE, approximately $23 million derived from ASO programs and approximately $44 million derived from employee assistance programs.

    MHN has approximately 1,300 full-time equivalent employees serving approximately 2,100 employer groups on a stand alone basis plus approximately 34,000 groups through Company affiliates, primarily in California and the Northeast.

    Headquartered in San Rafael, California, MHN has nationwide operations with full-service clinical intake offices in Los Angeles, New York, Dallas, Milwaukee, Las Vegas and Huntington Beach, California.

    WORKERS' COMPENSATION ADMINISTRATIVE SERVICES.  The Company's subsidiaries organized under Employer & Occupational Services Group, Inc. ("EOS") provide a full range of workers' compensation administrative services to insurers, self-funded employers, third-party claims administrators and public agencies. These services include injury reporting and provider referral, automated bill review and PPO network access, field and telephonic case management, direction of care and practice management, claim/benefit administration, claim investigation and adjudication, litigation management and employer personnel services. EOS has regional offices in California, Connecticut, Florida, Illinois, Kansas, North Carolina, Oregon and Texas. During 2000, EOS' Managed Care Services unit provided services on more than $1.3 billion of billed charges for medical care for

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covered beneficiaries of its customers. The unit processed over 2.5 million bills from providers and hospitals located in 50 states and handled nearly 95,000 intake calls resulting in the processing of over 63,000 injury reports and 57,000 medical care cases referred for case management services and/or utilization review services. EOS' Claims Administration Services unit handled more than 31,000 claims, with aggregate benefit payments by its payor customers in excess of $34 million. Also, EOS' Employment Services unit, a temporary staffing and direct placement service for managed care, workers' compensation and information technology specialists, placed 851 temporary assignments and had 4,600 personnel available for assignment in 14 states. For the year 2000, EOS' Managed Care Services, Claims Administration Services and Employment Services units generated revenues of approximately $75 million, $19 million and $9 million, respectively.

    PHARMACY BENEFIT MANAGEMENT.  Pharmacy benefits are managed through a variety of clinical, technological and contractual tools. The Company seeks to provide safe, effective medications that are affordable to its members. The Company outsources certain capital intensive functions of pharmacy benefit management, such as claim processing. However, the Company continues to actively utilize all other pharmacy management tools available. Some of the tools used are as follows:

•

Pharmacy Benefit Design—the Company has designed and sells three-tier pharmacy products that allow consumer choice while encouraging member financial participation.

•

Clinical programs that improve safety, efficacy and member compliance with prescribed medical treatment.

•

Retail and manufacturer contracts that lower the net cost.

•

Technological tools that automate claim adjudication and payment; technology also plays a key role in preventing members from receiving drugs that may harmfully interact with other medications being taken.

    HEALTH SERVICES INFORMATION.  Health Benchmarks, Inc. ("HBI"), formerly the Company's Quality Initiatives Division, was incorporated in 1999 as a wholly-owned subsidiary of the Company. HBI is a health services information company which provides services to the managed care sector, employers and the pharmaceutical industry. These services include data management (data warehouse tools) and data analysis, pharmacoeconomic analysis, Phase III and IV clinical trial support, and disease management programs and services that support National Committee for Quality Assurance ("NCQA") and Health Plan Employer Data and Information Set ("HEDIS") initiatives. HBI assists decision-makers in allocating health resources cost-effectively through evidence-based programs. HBI also supports certain quality assessment activities of the Company's health plans. In addition, HBI designs, implements and administers performance-based contracting programs for hospitals and physicians on behalf of managed care companies. In 2000, HBI generated approximately $8 million in revenues.

BUSINESS TRANSFORMATION AND INNOVATION SERVICES DIVISION

    The Company's Business Transformation and Innovation Services Division oversees all aspects of the Company's information technology operations and business process redesign efforts, seeking to make the Company's operational processes as efficient as possible through the use of enabling technology, such as the Internet. The Company believes that the Internet and related new technologies will fundamentally change managed care organizations. The Business Transformation and Innovation Services Division focuses on the strategic direction of the Company in light of the Internet and related technologies and pursues opportunities consistent with such direction. Currently, the Division 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 developing business

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concepts to take advantage of those market opportunities that provide value to consumers, purchasers of benefits and the providers of medical and health care services.

    INNOVATION SERVICES.  The Business Transformation and Innovation Services Division includes the Company's New Ventures Group, which develops technological tools to stream-line health care processes, empower consumers and reduce administrative burdens for members, beneficiaries, physicians, hospitals and employers. In this connection, the Company has undertaken, among other things, the following initiatives:

    Questium.  In 2000, the Company's subsidiary, Questium, Inc. ("Questium"), launched the website www.questium.com which is a health care consumer website that links health plan members directly with their personal health benefit information. The Questium website allows health plan members to customize their own web page and gain access to information and services such as customized health news and updates, and individual health coverage information, such as co-payment levels and out-of-pocket maximums. In the first half of 2001, Questium believes that health plan members will be able use the Questium website to refill mail order prescriptions online and view individual medical histories from health plan records. As of the date hereof, the Questium website offers, among other things, access to general consumer information, such as a health encyclopedia, alternative care and clinical trial information, and online health evaluation tools, such as a health risk calculator and weight-loss guide.

    A second phase, Questium 2.0, will offer employees and their dependents access, from either a PC at home or through their office desktop, to an integrated package of health/fitness, emotional health, work/life, personal growth and employee development services. The Company expects to add these services to its Questium consumer portal offering by partnering with industry leaders. These services are expected to become available in summer, 2001.

    Provider/Payor Connectivity.  Provider/payor connectivity solutions will enable health care providers and health care payors, including delegated medical groups, to electronically exchange administrative, financial and clinical information. The Company began the MedUnite initiative in 1999 to develop a provider/payor connectivity solution. MedUnite has subsequently come to include six other nationally prominent health plans. MedUnite operates as its own enterprise in which the Company retains an approximately 15% ownership interest. MedUnite is scheduled to begin pilot operations in California and the East Coast in March, 2001. The Company, through its subsidiary, Physicians Health Services, Inc., is also employing another provider/payor connectivity solution in the Northeast. This solution is supported by NaviMedix, Inc. and currently has more than 5,000 physicians using Internet-based services in the tri-state area of Connecticut, New York and New Jersey.

    Online Enrollment and Billing.  Online enrollment and billing initiatives are nearing completion for the Company's commercial health plan and TRICARE lines of business. These initiatives permit health plan members/beneficiaries to enroll in health coverage, pay applicable fees, and select a primary care physician using the Internet. Additionally, the Company's member services and enrollment employees will perform enrollment and billing activities through the Internet using these innovative solutions. Both enrollment and billing initiatives are scheduled to begin pilot operations in April, 2001.

    MANAGEMENT INFORMATION SYSTEMS.  Effective information technology systems are critical to the Company's operations. The Company's information technology systems include several computer systems, each utilizing a combination of packaged and customized software and a network of online terminals. The information technology systems gather and store data on the Company's members and physician and hospital providers. The systems contain all of the Company's necessary membership and claims-processing capabilities as well as marketing and medical utilization programs. These systems provide the Company with an integrated system of billing, reporting, member services and claims processing, and the ability to examine member encounter information for the optimization of clinical outcomes. In this connection, as set forth above, the Company is in the process of developing and

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implementing online enrollment and billing solutions for the Company's health plan and TRICARE operations, which the Company believes will simplify and expedite administrative functions.

PROVIDER RELATIONSHIPS AND RESPONSIBILITIES

    PHYSICIAN RELATIONSHIPS.  Upon enrollment in most of the Company's HMO plans, each member selects a participating physician group ("PPG") or primary care physician from the HMO's provider panel. The primary care physicians and PPGs assume overall responsibility for the care of members. Medical care provided directly by such physicians includes the treatment of illnesses not requiring referral, as well as physical examinations, routine immunizations, maternity and child care, and other preventive health services. The primary care physicians and PPGs are responsible for making referrals (approved by the HMO's or PPG's medical director) to specialists and hospitals. Certain Company HMOs offer enrollees "open panels" under which members may access any physician in the network without first consulting a primary care physician.

    The following table sets forth the number of primary care and specialist physicians with whom the Company's HMOs (and certain of such HMOs' PPGs) were contracted as of December 31, 2000 in each of the Company's Health Plan Divisions:

	WESTERN DIVISION	EASTERN DIVISION
Primary Care Physicians	29,808	20,815
Specialist Physicians	65,889	43,237
Total	95,697	64,052

    PPG and physician contracts are generally for a period of at least one year and are automatically renewable unless terminated, with certain requirements for maintenance of good professional standing and compliance with the Company's quality, utilization and administrative procedures. In California, PPGs generally receive a monthly "capitation" fee for every member served. The capitation fee represents payment in full for all medical and ancillary services specified in the provider agreements. The non-physician component of all hospital services is covered by a combination of capitation and/or per diem charges. In such capitated arrangements, in cases where the capitated provider cannot provide the health care services needed, such providers generally contract with specialists and other ancillary service providers to furnish the requisite services pursuant to capitation agreements or negotiated fee schedules with specialists. Many of the Company's HMOs outside California reimburse physicians according to a discounted fee-for-service schedule, although several HMOs have capitation arrangements with certain providers and provider groups in their market areas.

    HOSPITAL RELATIONSHIPS.  The Company's HMOs arrange for hospital care primarily through contracts with selected hospitals in their service areas. Such hospital contracts generally provide for multi-year terms and provide for payments on a variety of bases, including capitation, per diem rates, case rates and discounted fee-for-service schedules.

    Covered inpatient hospital care for a member is comprehensive; it includes the services of physicians, nurses and other hospital personnel, room and board, intensive care, laboratory and x-ray services, diagnostic imaging and generally all other services normally provided by acute-care hospitals. HMO or PPG nurses and medical directors are actively involved in discharge planning and case management, which often involves the coordination of community support services, including visiting nurses, physical therapy, durable medical equipment and home intravenous therapy.

    COST CONTAINMENT.  In most HMO plan designs, the primary care physician or PPG is responsible for authorizing all needed medical care except for emergency medical services. By coordinating care through such physicians in cases where reimbursement includes risk-sharing

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arrangements, the Company believes that inappropriate use of medical resources is reduced and efficiencies are achieved.

    To limit possible abuse in utilization of hospital services in non-emergency situations, in most of the Company's health plans a certification process for certain medical conditions precedes the inpatient admission of each member, followed by continuing review during the member's hospital stay. In addition to reviewing the appropriateness of hospital admissions and continued hospital stay, the Company plays an active role in evaluating alternative means of providing care to members and encourages the use of outpatient care, when appropriate, to reduce the cost that would otherwise be associated with an inpatient admission.

    QUALITY ASSESSMENT.  Quality assessment is a continuing priority for the Company. Most of the Company's health plans have a quality assessment plan administered by a committee comprised of medical directors and primary care and specialist physicians. The committees' responsibilities include periodic review of medical records, development and implementation of standards of care based on current medical literature and community standards, and the collection of data relating to results of treatment. All of the Company's health plans also have a subscriber grievance procedure and/or a member satisfaction program designed to respond promptly to member grievances. Aspects of such member services programs take place both within the PPGs and within the Company's health plans.

DIVESTITURES

    FLORIDA OPERATIONS.  In January, 2001, the Company entered into a definitive agreement to sell its Florida health plan for $48 million, consisting of $23 million in cash and $25 million in a secured five-year note bearing 8% interest. Although the Company has entered into a definitive agreement for the sale, consummation of the sale is subject to various conditions and certain regulatory approvals. The Company anticipates closing the sale in the second quarter of 2001. The Company also agreed to sell the corporate facility building used by its Florida health plan under defined terms which require the Company to finance the sale over five years.

    OHIO, WEST VIRGINIA AND WESTERN PENNSYLVANIA OPERATIONS.  In 2000, the Company decided to exit the Ohio, West Virginia and Western Pennsylvania markets in which it operated. In this connection, the Company provided notice of intention to withdraw from such service areas to the appropriate regulators. As of February, 2001, the Company no longer had any members in such markets. Upon completion of its withdrawal efforts, the Company intends to dissolve its subsidiaries operating in such markets and to recover any remaining capital.

    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 the definitive 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 in Colorado 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

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eastern Washington and Blue Cross of Idaho offered replacement coverage for certain members who reside in Idaho. The transition of membership in Washington and Idaho was completed in the second quarter of 2000.

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    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.

ADDITIONAL INFORMATION CONCERNING THE COMPANY'S BUSINESS

    MARKETING AND SALES.  Marketing for group Health Plan business is a three-step process in which the Company, first, markets to potential employer groups and group insurance brokers; second, provides information directly to employees once the employer has selected Company health coverage; and third, engages members and employers in marketing for member and group retention. Although the Company markets its programs and services primarily through independent brokers, agents and consultants, the Company uses its limited internal sales staff to serve certain large employer groups. Once selected by an employer, the Company solicits enrollees from the employee base directly. During "open enrollment" periods when employees are permitted to change health care programs, the Company uses direct mail, work day and health fair presentations, telemarketing, outdoor print and radio advertisements to attract new enrollees. The Company's sales efforts are supported by its marketing division, which includes product research development, multicultural marketing, advertising and communications, and member education and retention programs.

    Premiums for each employer group are generally contracted for on a yearly basis, payable monthly. Numerous factors are considered by the Company in setting its monthly premiums, including employer group needs and anticipated health care utilization rates as forecasted by the Company's management based on the demographic composition of, and the Company's prior experience in, its service areas. Premiums are also affected by applicable regulations that prohibit experience rating of group accounts (i.e., setting the premium for the group based on its past use of health care services) and by state regulations governing the manner in which premiums are structured.

    The Company believes that the importance of the ultimate health care consumer (or member) in the health care product purchasing process is likely to increase in the future, particularly in light of advances in technology and online resources. Accordingly, the Company intends to focus its marketing strategies on the development of distinct brand identities and innovative product service offerings that will appeal to potential Health Plan members.

    COMPETITION.  HMOs operate in a highly competitive environment in an industry currently subject to significant changes from business consolidations, new strategic alliances, legislative reform and market pressures brought about by a better informed and better organized customer base. The Company's HMOs face substantial competition from for-profit and nonprofit HMOs, PPOs, self-funded plans (including self-insured employers and union trust funds), Blue Cross/Blue Shield plans, and traditional indemnity insurance carriers, some of which have substantially larger enrollments and greater financial resources than the Company. The Company believes that the principal competitive features affecting its ability to retain and increase membership include the range and prices of benefit plans offered, provider network, quality of service, responsiveness to user demands, financial stability, comprehensiveness of coverage, diversity of product offerings, and market presence and reputation. The relative importance of each of these features and key competitors varies by market. The Company believes that it competes effectively with respect to all of these factors.

    Kaiser Foundation Health Plan ("Kaiser") is the largest HMO in California and is a competitor of the Company in the California HMO industry. In addition to Kaiser, the Company's other HMO competitors include PacifiCare of California, California Care (Blue Cross) and Blue Shield. There are also a number of other types of competitors including self-directed plans, traditional indemnity insurance plans, and other managed care plans. Despite the concentration of membership in the large health plans, the environment in the state is also impacted by small, regional-based HMOs, whose

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combined membership the Company believes constitutes approximately 20-25% of the market. In addition, the Company competes in California against a variety of PPOs.

    The Company's largest competitor in Arizona is United Healthcare. The Company's Arizona HMO also competes with CIGNA, PacifiCare, Aetna and Blue Cross/Blue Shield. The Company's Oregon HMO competes primarily against other HMOs including Kaiser, PacifiCare of Oregon, Providence, Blue Cross, Lifewise and Blue Shield Regions, and with various PPOs.

    The Company's HMOs in Connecticut compete for business with commercial insurance carriers, Anthem Connecticut, Aetna/U.S. Healthcare, Connecticare and more than eight other HMOs. The Company's main competitors in Pennsylvania, New York and New Jersey are Aetna/U.S. Healthcare, Empire Blue Cross, Oxford Health Plans, United Healthcare, Horizon Blue Cross and Keystone Health Plan East. The Company's HMO operations in Florida compete for business with Humana Medical Plan, United Healthcare, Health Options and Prudential HealthCare, among others. In January, 2001, the Company entered into a definitive agreement for the sale of its Florida health plan. See "Divestitures."

    In 2000, the Company decided to exit the Ohio, West Virginia and Western Pennsylvania markets in which it operated and provided notice of intention to withdraw from such service areas to the appropriate regulators. The Company ceased having active membership in such markets as of February, 2001.

    GOVERNMENT REGULATION.  The Company believes it is in compliance in all material respects with all current state and federal regulatory requirements applicable to the business being conducted by its subsidiaries. Certain of these requirements are discussed below.

    California HMO Regulations.  California HMOs such as Health Net of California, Inc. ("HN California") and certain of the Company's specialty plans are subject to California state regulation, principally by the Department of Managed Health Care ("DMHC") under the Knox-Keene Act. Among the areas regulated by the Knox-Keene Act are: (i) adequacy of administrative operations, (ii) the scope of benefits required to be made available to members, (iii) manner in which premiums are structured, (iv) procedures for review of quality assurance, (v) enrollment requirements, (vi) composition of policy making bodies to assure that plan members have access to representation, (vii) procedures for resolving grievances, (viii) the interrelationship between HMOs and their health care providers, (ix) adequacy and accessibility of the network of health care providers, (x) provider contracts, and (xi) initial and continuing financial viability of the HMO and its risk-bearing providers. Any material modifications to the organization or operations of HN California are subject to prior review and approval by the DMHC. This approval process can be lengthy and there is no certainty of approval. Other significant changes require filing with the DMHC, which may then comment and require changes. In addition, under the Knox-Keene Act, HN California and certain other Company subsidiaries must file periodic reports with, and are subject to periodic review and investigation by, the DMHC. Non-compliance with the Knox-Keene Act may result in an enforcement action, fines and penalties, and in egregious cases, limitations on or revocation of the Knox-Keene license.

    Federal HMO Regulations.  Under the Federal Health Maintenance Organization Act of 1973 (the "HMO Act"), services to members must be provided substantially on a fixed, prepaid basis without regard to the actual degree of utilization of services. Premiums established by an HMO may vary from account to account through composite rate factors and special treatment of certain broad classes of members, and through prospective (but not retrospective) rating adjustments. Several of the Company's HMOs are federally qualified in certain parts of their respective service areas under the HMO Act and are therefore subject to the requirements of such act to the extent federally qualified products are offered and sold.

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    Additionally, there are a number of recently enacted federal laws that further regulate managed health care. Such legislation includes the Balanced Budget Act of 1997 and the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"). The purposes of HIPAA are to (i) limit pre-existing condition exclusions applicable to individuals changing jobs or moving to individual coverage, (ii) guarantee the availability of health insurance for employees in the small group market, (iii) prevent the exclusion of individuals from coverage under group plans based on health status and (iv) establish national standards for the electronic exchange of health information. In December, 2000, the Department of Health and Human Services ("DHHS") promulgated certain regulations under HIPAA related to the privacy of individually identifiable health information, referred to as protected health information or "PHI". The new regulations require health plans, clearinghouses and providers to (a) comply with various requirements and restrictions related to the use, storage and disclosure of PHI, (b) adopt rigorous internal procedures to protect PHI and (c) enter into specific written agreements with business associates to whom PHI is disclosed. The regulations establish significant criminal penalties and civil sanctions for non-compliance. In addition, the regulations could expose the Company to additional liability for, among other things, violations by its business associates. In February, 2001, the DHHS stated that the regulations in their current form would require compliance by April, 2003. The Company believes that the costs required to comply with the regulations will be significant and may have a material adverse impact on the Company's business or results of operations.

    The Company's Medicare contracts are subject to regulation by HCFA. HCFA has the right to audit HMOs operating under Medicare contracts to determine the quality of care being rendered and the degree of compliance with HCFA's contracts and regulations. The Company's Medicaid business is also subject to regulation by HCFA, as well as state agencies.

    Other HMO Regulations.  In each state in which the Company does business, HMOs must meet numerous state licensing criteria and secure the approval of state licensing authorities before implementing certain operational changes, including the development of new product offerings and, in some states, the expansion of service areas. To remain licensed, each HMO must continue to comply with state laws and regulations and may from time to time be required to change services, procedures or other aspects of its operations to comply with changes in applicable laws and regulations. In addition, HMOs must file periodic reports with, and their operations are subject to periodic examination by, state licensing authorities. HMOs are required by state law to meet certain minimum capital and deposit and/or reserve requirements in each state and may be restricted from paying dividends to their parent corporations under certain circumstances. Several states have increased minimum capital requirements, pursuant to proposals by the National Association of Insurance Commissioners to institute risk-based capital requirements. Regulations in these and other states may be changed in the future to further increase equity requirements. Such increases could require the Company to contribute additional capital to its HMOs. Any adverse change in governmental regulation or in the regulatory climate in any state could materially impact the HMOs operating in that state. The HMO Act and state laws place various restrictions on the ability of HMOs to price their products freely. The Company must comply with certain provisions of state insurance and similar laws, including regulations governing the Company's ability to seek ownership interests in new HMOs, PPOs and insurance companies, or otherwise expand its geographic markets or diversify its product lines.

    Insurance Regulations.  State departments of insurance (the "DOIs") regulate insurance and third-party administrator business conducted by certain subsidiaries of the Company (the "Insurance Subsidiaries") pursuant to various provisions of state insurance codes and regulations promulgated thereunder. The Insurance Subsidiaries are subject to various capital reserve and other financial, operating and disclosure requirements established by the DOIs and state laws. The Insurance Subsidiaries must also file periodic reports regarding their activities regulated by the DOIs and are subject to periodic reviews of those activities by the DOIs. The Company must also obtain approval

15

from, or file copies with, the DOIs for all of its group and individual policies prior to issuing those policies.

    PENDING FEDERAL AND STATE LEGISLATION.  There are a number of initiatives and regulations currently pending at the federal and state level which could increase regulation of the health care industry. Such legislation includes "managed care reform," "patients' bill of rights" and certain other initiatives which, if enacted, could have significant adverse effects on the Company's operations. See "Item 4—Cautionary Statements—Federal and State Legislation." For example, one version of the proposed "patients' bill of rights" would allow a subscriber to hold an employer liable for damages alleged under subscriber's health plan. If enacted, such initiative could significantly impact employer choices in health plan coverage. The Company cannot predict the outcome of any of the pending legislative or regulatory proposals, nor the extent to which the Company may be affected by the enactment of any such legislation or regulation.

    ACCREDITATION.  The Company pursues accreditation for certain of its health plans from the National Committee for Quality Assurance and the Joint Committee on Accreditation of Healthcare Organizations ("JCAHO"). NCQA and JCAHO are independent, non-profit organizations that review and accredit HMOs. HMOs that comply with review requirements and quality standards receive accreditation. The Company's HMO subsidiaries in the following states have received NCQA accreditation: Florida and Arizona (certain product lines). Certain of the Company's other Health Plan subsidiaries are in the process of applying for NCQA or JCAHO accreditation.

SERVICE MARKS

    The Company's service marks and/or trademarks include, among others: THE ACUTE CARE ALTERNATIVE®, Alliance 2000^sm, Alliance 1000^sm, Asthmawise^sm, AVP^sm, AVP Vision Plans^sm, BabyWell^sm, BEING WELL®, CARECAID®, CMP®, COMBINED CARE®, COMBINED CARE PLUS^sm, COMMUNITY MEDICAL PLAN, INC. and design®, A CURE FOR THE COMMON HMO®, Feetbeat Worksite Walking Program^sm, FIRM SOLUTIONS®, FLEX ADVANTAGE®, FLEX NET^sm, FOUNDATION HEALTH and design®, FOUNDATION HEALTH GOLD®, Foundation Health Systems^sm, HANK®, HANK and design®, HEALTH NET®, Health Net ACCESS^sm, Health Net Comp.24^sm, Health Net ELECT^sm, Health Net INSIGHT^sm, Health Net OPTIONS^sm, Health Net SELECT^sm, Health Net Seniority Plus^sm, Health Smart and design^sm, Healthworks (stylized)^sm, Heart & Soul^sm, IMET and design®, Indian design®, INDIVIDUAL PREFERRED PPO®, InterCare^sm, InterComp^sm, InterFlex^sm, Inter Mountain Employers Trust^sm, InterPlus^sm, LIFE WITH DIGNITY AND HOPE®, MAKING QUALITY HEALTH CARE AFFORDABLE®, M.D. Health Plan Personal Medical Management^sm, On the Road to Good Health^sm, PHYSICIANS HEALTH SERVICES®, QUALASSIST®, QUALADMIT®, QUALCARE®, QUALCARE PREFERRED®, QUAL-MED®, QUALMED^sm, QUALMED HEALTH & LIFE INSURANCE COMPANY®, QUALMED PLANS FOR HEALTH®, Rapid Access^sm, SENIOR SECURITY®, SENIOR VALUE®, Someone at Your Side^sm, Sun/Mountain design®, The Final Piece of the Healthcare Puzzle^sm, VitalLine^sm, VITALTEAM®, WELL MANAGED CARE RIGHT FROM THE START®, WELL REWARDS®, Well Woman^sm, Wise Choice^sm, WORKING WELL TOGETHER®, and Your Partner in Healthy Living^sm, and certain designs related to the foregoing.

    The Company utilizes these and other marks in connection with the marketing and identification of products and services. The Company believes such marks are valuable and material to its marketing efforts.

EMPLOYEES

    The Company currently employs approximately 11,000 employees, excluding temporary employees. Such employees perform a variety of functions, including administrative services for employers,

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providers and members, negotiation of agreements with physician groups, hospitals, pharmacies and other health care providers, handling claims for payment of hospital and other services, and providing data processing services. The Company's employees are not unionized and the Company has not experienced any work stoppage since its organization. The Company considers its relations with its employees to be very good.

ITEM 2. PROPERTIES

    The Company leases office space for its principal executive offices in Woodland Hills, California and its offices in Rancho Cordova, California.

    The Woodland Hills facility, with approximately 425,000 square feet, is leased pursuant to two leases. The aggregate rent for the two leases for 2000 was approximately $11.8 million. The Company's principal executive offices are located in the Woodland Hills facility, as are much of the Company's California HMO operations. The lease for the California HMO operations, covering approximately 310,000 square feet, expires on December 31, 2001. The Company will relocate its California HMO operations to a new facility in Woodland Hills pursuant to a recently executed ten-year lease for approximately 290,000 square feet. During the first six years of the lease for the new facility, the Company can reduce the amount of leased square footage by up to a maximum of 32%, by paying certain unamortized costs of improvements and commissions. The separate lease for the Company's executive offices expires December 31, 2004, and contains a renewal option.

    The Company and its subsidiaries also lease an aggregate of approximately 410,000 square feet of office space in Rancho Cordova, California. The Company's aggregate rent obligations under these leases were approximately $6.4 million in 2000. These leases expire at various dates through January, 2003. The Rancho Cordova facilities house certain Government Contracts, Specialty Services and California HMO operations.

    The Company also leases a total of approximately 250,000 square feet of office space in Irvine, California and San Rafael, California for certain Specialty Services operations. In addition to the Company's office space referenced above, the Company and its subsidiaries lease approximately 130 sites in 23 states, comprising roughly 1.5 million square feet of space.

    In addition, the Company owns facilities comprising, in the aggregate, approximately 1.1 million square feet of space. These facilities include headquarters for the Company's health plan subsidiaries in Arizona, Connecticut and Florida, as well as a data processing facility in Rancho Cordova, California. The Company is currently considering the sale of certain care centers in California and Arizona and unoccupied office buildings in Colorado and California.

    Management believes that its ownership and rental costs are consistent with those available for similar space in the applicable local area. The Company's properties are well maintained, considered adequate and are being utilized for their intended purposes.

ITEM 3. LEGAL PROCEEDINGS

SUPERIOR NATIONAL INSURANCE GROUP, INC.

    The Company and its former wholly-owned subsidiary, Foundation Health Corporation ("FHC"), were 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").

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    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 parties are currently engaged in discovery. On January 1, 2001, FHC was merged into the Company.

    The Company 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. The Company intends to vigorously defend the actions.

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. The Company

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has satisfied substantially all of the judgment, and the parties recently resolved their remaining issues related to the interest awarded on the judgment, which the Company was appealing.

ROMERO (FORMERLY 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 complaint seeks certification of a nationwide class action and alleges that cost containment measures used by the Company's 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. On June 23, 2000, the plaintiffs filed amended complaints in a Humana action that had been consolidated pursuant to the multi-district litigation statute in the Southern District of Florida to add claims against other managed care organizations, including the Company. On October 23, 2000, the court allowed the plaintiffs to further amend the complaint against the Company to add two new named plaintiffs and withdraw the originally named plaintiff, Kerrie Pay, from the action. Consequently, this case will now be entitled Romero v. Foundation Health Systems, Inc. On October 23, 2000, the Judicial Panel on Multi-District Litigation ruled that the action originally filed against the Company in the Southern District of Mississippi should be consolidated, for purposes of pre-trial proceedings only, with other cases pending against managed care organizations in the United States District Court for the Southern District of Florida in Miami. The Company has filed a motion to dismiss the case. Briefing on the motion to dismiss has been completed and the matter is currently pending before the court. Preliminary discovery and briefing regarding the plaintiff's motion for class certification has also been completed and the hearing on class certification has been scheduled for May 8, 2001. The Company intends to vigorously defend the action.

SHANE V. FOUNDATION HEALTH SYSTEMS, INC.

    On August 17, 2000, a complaint was filed in the United States District Court for the Southern District of Florida in a lawsuit entitled Shane v. Humana, Inc., et al. (including Foundation Health Systems, Inc.) (00-1334-MD). The complaint seeks certification of a nationwide class action on behalf of physicians and alleges that the defendant managed care companies' methods of reimbursing physicians violate provisions of the RICO, ERISA, certain federal regulations and various state laws. The action seeks unspecified damages and injunctive relief. On September 22, 2000, the Company filed a motion to dismiss, or in the alternative to compel arbitration. On December 11, 2000, the court granted in part and denied in part the Company's motion to compel arbitration. Under the court's order, the single named plaintiff to allege a direct contractual relationship with the Company is compelled to arbitrate his direct claims against the Company. The Company has filed an appeal in the United States Court of Appeals for the 11^th Circuit seeking to overturn the portion of the district court's ruling that did not order certain claims to arbitration. On March 2, 2001, the District Court for the Southern District of Florida issued an order granting the dismissal of certain claims with prejudice and the dismissal of certain other claims without prejudice, and denying the dismissal of certain claims. On March 26, 2001, a consolidated amended complaint was filed in this action against managed care companies, including the Company. This consolidated complaint adds new plaintiffs, including Leonard Klay and the California Medical Association (who, as set forth below, had previously filed claims against the Company), and has, in addition to revising the pleadings of the original claims, added a claim under the California Business and Professions Code. The Company intends to file a motion to dismiss the consolidated amended complaint. Preliminary discovery and briefing regarding the plaintiffs' motion for class certification has taken place and the hearing on plaintiff's motion for class certification

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is currently scheduled for May 7, 2001. In light of the filing of the March 26, 2001 consolidated complaint, additional class discovery and briefing may occur and the hearing on class certification may be rescheduled. The Company intends to vigorously defend the action.

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. The State of Connecticut has filed an appeal. The Company intends to vigorously defend the action.

    Meanwhile, on September 7, 2000, the Attorney General of Connecticut, Richard Blumenthal, filed another lawsuit against Physicians Health Services of Connecticut, Inc. ("PHS-CT"). This new suit also names Foundation Health Systems, Inc., Anthem Blue Cross and Blue Shield of CT, Anthem Health Plans, Inc., CIGNA Healthcare of CT, Inc., Oxford Health Plans of CT, Inc. as defendants, and asserts claims against PHS-CT and the Company that are similar, if not identical, to those asserted in the previous lawsuit that was dismissed on July 12, 2000. On November 30, 2000, the clerk of the Judicial Panel on Multi-District Litigation entered an order conditionally transferring this case to the United States District Court for the Southern District of Florida to be consolidated for pretrial proceedings only with the other cases against managed care organizations pending in that court. The clerk of the Judicial Panel on Multi-District Litigation stayed the conditional transfer order on December 15, 2000 pending briefing and argument concerning whether transfer is appropriate. The Connecticut District Court has stayed the case pending the outcome of the Judicial Panel on Multi-District Litigation proceedings. The Company intends to vigorously defend the action.

ALBERT V. PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC.

    On September 7, 2000, a complaint was filed in the United States District Court for the District of Connecticut in a lawsuit entitled Albert v. CIGNA Healthcare of Connecticut, Inc., et al. (including Physicians Health Services of Connecticut, Inc. and Foundation Health Systems, Inc.) (300CV1717-CJS). The complaint seeks certification of a nationwide class action and alleges that the defendant managed care companies' various practices violate provisions of the federal Employee Retirement Income Security Act ("ERISA"). The action seeks unspecified damages and injunctive relief. On November 30, 2000, the clerk of the Judicial Panel on Multi-District Litigation entered an order conditionally transferring this case to the United States District Court for the Southern District of Florida to be consolidated for pre-trial proceedings only with the other cases against managed care organizations pending in that court. The clerk of the Judicial Panel on Multi-District Litigation stayed the conditional transfer order on December 18, 2000 pending briefing and argument concerning whether transfer is appropriate. The plaintiff is objecting to transfer. The Company intends to vigorously defend the action.

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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. On October 23, 2000, the Judicial Panel on Multi-District Litigation ruled that this case should be consolidated, for purposes of pre-trial proceedings only, with other cases pending against managed care organizations in the United States District Court for the Southern District of Florida in Miami. On February 22, 2000, the California Medical Association filed an amended complaint in the Southern District of Florida adding claims under certain federal regulations and the California Business and Professions Code. As set forth above, on March 26, 2001, the California Medical Association was named as an additional plaintiff in the consolidated amended complaint filed in the Shane action. The Company intends to vigorously defend the action.

CONNECTICUT STATE MEDICAL SOCIETY V. PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC.

    On February 14, 2001, the Connecticut State Medical Society filed a complaint in Connecticut State Court against Physicians Health Services of Connecticut, Inc. alleging violations of the Connecticut Unfair Trade Practices Act. The complaint alleges that PHS-CT engaged in conduct that was designed to delay, deny, impede and reduce lawful reimbursement to physicians who rendered medically necessary health care services to PHS-CT health plan members. The complaint, which is similar to others filed against the Company and other managed care companies, seeks declaratory and injunctive relief. PHS-CT has not yet responded to the complaint, but intends to vigorously defend the action.

KEVIN LYNCH, M.D. AND KAREN LAUGEL, M.D. V. PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC.

    On February 14, 2001, a purported class action lawsuit was filed in Connecticut State Court against Physicians Health Services of Connecticut, Inc. by Kevin Lynch, M.D. and Karen Laugel, M.D. on behalf of physicians members of the Connecticut State Medical Society who provide health care services to PHS-CT health plan members pursuant to provider service contracts. The complaint alleges that PHS-CT engaged in improper, unfair and deceptive practices by denying, impeding and/or delaying lawful reimbursement to physicians. The complaint, similar to the complaint referred to above filed against PHS-CT on the same day by the Connecticut State Medical Society, seeks declaratory and injunctive relief, and damages. PHS-CT has not yet responded to the complaint, but intends to vigorously defend the action.

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LEONARD KLAY, M.D. V. PRUDENTIAL INS CO OF AMERICA, UNITED HEALTHCARE, AETNA, INC., AETNA US HEALTHCARE, CIGNA CORP., CONNECTICUT GENERAL CORP., FOUNDATION HEALTH SYSTEMS, INC., PACIFICARE HEALTH SYSTEMS AND WELLPOINT HEALTH NETWORKS, INC.

    On February 22, 2001, a purported class action Complaint was filed in the United States District Court for the Southern District of Florida against several managed care companies, including the Company, on behalf of individual physicians in California who provided health care services to members of the defendants' health plans. The complaint alleges violations of RICO, ERISA, certain federal regulations, the California Business and Professions Code and certain state common law doctrines, and seeks declaratory and injunctive relief, and damages. As set forth above, on March 26, 2001, Leonard Klay was named as an additional plaintiff in the consolidated amended complaint filed in the Shane action. The Company has not yet responded to the Complaint, but 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    There were no matters submitted to a vote of the security holders of the Company, either through solicitation of proxies or otherwise, during the fourth quarter of the year ended December 31, 2000.

OTHER INFORMATION

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, N.A. 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, the Fourth Amendment of Credit Agreement dated as of March 26, 1999 and the Fifth Amendment to Credit Agreement dated as of September 20, 2000 (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

22

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 December 31, 2000, the maximum commitment level permitted under the Credit Agreement was approximately $1.36 billion, of which approximately $590 million remained available. The Amendments also have provided for an increase in the interest and facility fees under the Credit Agreement. The Company is able to obtain letters of credit under the Credit Agreement up to an aggregate amount of $100 million.

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" the Rights separate from the Common Stock under the circumstances described below below and in accordance with the provisions of the Rights Agreement, 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 following any person, together with its affiliates and associates (an "Acquiring Person"), becoming the beneficial owner of 15% or more of the outstanding Class A Common Stock, the commencement of a tender or exchange offer that would result in any person, together with its affiliates and associates, becoming the beneficial owner of 15% or more of the outstanding Class A Common Stock or the determination by the Board of Directors that a person, together with its affiliates and associates, has become the beneficial owner of 10% or more of the Class A Common Stock and that such person is an "Adverse Person," as defined in the Rights Agreement.

    The Rights will first become exercisable on the Distribution Date and will expire on July 31, 2006, unless earlier redeemed by the Company as described below. Except as set forth below and subject to adjustment as provided in the Rights Agreement, each Right entitles its registered holder 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.

    Subject to certain exceptions contained in the Rights Agreement, in the event that any person shall become an Acquiring Person or be declared to be an Adverse Person, then the Rights will "flip-in" and entitle each holder of a Right, other than any Acquiring Person or Adverse Person, to purchase, upon exercise at the then-current exercise price of such Right, that number of shares of Class A Common Stock having a market value of two time such exercise price.

    In addition, and subject to certain exceptions contained in the Rights Agreement, in the event that the Company is acquired in a merger or other business combination in which the Class A Common Stock does not remain outstanding or is changed or 50% of the assets or earning power of the Company is sold or otherwise transferred to any other person, the Rights will "flip-over" and entitle each holder of a Right, other than an Acquiring Person or an Adverse Person, to purchase, upon exercise at the then current exercise price of such Right, such number of shares of common stock of the acquiring company which at the time of such transaction would have a market value of two times such exercise price.

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    The Company may redeem the Rights until the earlier of 10 days following the date that any person becomes the beneficial owner of 15% or more of the outstanding Class A Common Stock and the date the Rights expire at a price of $.01 per Right.

    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 separation of 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 entirety by reference to the Rights Agreement.

CAUTIONARY STATEMENTS

    In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby filing cautionary statements identifying important risk factors that could cause the Company's actual results to differ materially from those projected in forward-looking statements of the Company made by or on behalf of the Company.

    The Company wishes to caution readers that these factors, among others, could cause the Company's actual financial or enrollment results to differ materially from those expressed in any projected, estimated or forward-looking statements relating to the Company. The following factors should be considered in conjunction with any discussion of operations or results by the Company or its representatives, including any forward-looking discussion, as well as comments contained in press releases, presentations to securities analysts or investors, or other communications by the Company.

    In making these statements, the Company is not undertaking to address or update each factor in future filings or communications regarding the Company's business or results, and is not undertaking to address how any of these factors may have caused changes to discussions or information contained in previous filings or communications. In addition, certain of these matters may have affected the Company's past results and may affect future results.

    HEALTH CARE COSTS.  A large portion of the revenue received by the Company is expended to pay the costs of health care services or supplies delivered to its members. The total health care costs incurred by the Company are affected by the number of individual services rendered and the cost of each service. Much of the Company's premium revenue is set in advance of the actual delivery of services and the related incurring of the cost, usually on a prospective annual basis. While the Company attempts to base the premiums it charges at least in part on its estimate of expected health care costs over the fixed premium period, competition, regulations and other circumstances may limit the Company's ability to fully base premiums on estimated costs. In addition, many factors may and often do cause actual health care costs to exceed those costs estimated and reflected in premiums. These factors may include increased utilization of services, increased cost of individual services, catastrophes, epidemics, seasonality, new mandated benefits or other regulatory changes, and insured population characteristics.

    The managed health care industry is labor intensive and its profit margin is low. Hence, it is especially sensitive to inflation. Health care industry costs have been rising annually at rates higher than the Consumer Price Index. Increases in medical expenses without corresponding increases in premiums could have a material adverse effect on the Company.

    PHARMACEUTICAL COSTS.  The costs of pharmaceutical products and services are increasing faster than the costs of other medical products and services. Thus, the Company's HMOs face ever

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higher pharmaceutical expenses. The inability to manage pharmaceutical costs could have an adverse effect on the Company's financial condition.

    FEDERAL AND STATE LEGISLATION.  There are frequently legislative proposals before Congress and the state legislatures which, if enacted, could materially affect the managed health care industry and the regulatory environment. Recent financial difficulties of certain health care service providers and plans and/or continued publicity of the health care industry could alter or increase legislative consideration of these or additional proposals. These proposals include "managed care reform," "patients' bill of rights" and certain other initiatives which, if enacted, could have significant adverse effects on the Company's operations. Such measures propose, among other things, to:

•

expand health plan exposure to tort and other liability, under federal and/or state law, including for coverage determinations, provider malpractice and care decisions;



•

restrict a health plan's ability to limit coverage to medically necessary care;



•

require third party review of certain care decisions;



•

expedite or modify grievance and appeals procedures;



•

mandate certain benefits and services that could increase costs;



•

restrict a health plan's ability to select and/or terminate providers; and



•

restrict or eliminate the use of prescription drug formularies.

    The Company cannot predict the outcome of any of these legislative or regulatory proposals, nor the extent to which the Company may be affected by the enactment of any such legislation or regulation. Legislation or regulation which causes the Company to change its current manner of operation or increases its exposure to liability could have a material adverse effect on the Company's results of operations, financial condition and ability to compete.

    In addition, in December, 2000, the Department of Health and Human Services promulgated certain regulations under HIPAA related to the privacy of individually identifiable health information, referred to as protected health information or "PHI". The new regulations require health plans, clearinghouses and providers to (a) comply with various requirements and restrictions related to the use, storage and disclosure of PHI, (b) adopt rigorous internal procedures to protect PHI and (c) enter into specific written agreements with business associates to whom PHI is disclosed. The regulations establish significant criminal penalties and civil sanctions for non-compliance. In addition, the regulations could expose the Company to additional liability for, among other things, violations by its business associates. In February, 2001, the DHHS stated that the regulations in their current form would require compliance by April, 2003. The Company believes that the costs required to comply with the regulations will be significant and may have a material adverse impact on the Company's business or results of operations.

    PROVIDER RELATIONS.  The Company contracts with physicians, hospitals and other providers as a means to manage health care costs and utilization and to monitor the quality of care being delivered. In any particular market providers could refuse to contract with the Company, demand higher payments or take other actions which could result in higher health care costs, less desirable products for customers and members, insufficient provider access for current members or to support growth, or difficulty in meeting regulatory or accreditation requirements.

    In some markets, certain providers, particularly hospitals, physician/hospital organizations or multi-specialty physician groups, may have significant market positions or even monopolies. Many of these providers may compete directly with the Company. If such providers refuse to contract with the Company or utilize their market position to negotiate favorable contracts or place the Company at a competitive disadvantage, the Company's ability to market products or to be profitable in those areas could be adversely affected.

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    The Company contracts with providers in California and to a lesser degree in other areas, primarily through capitation fee arrangements. Under a capitation fee arrangement, the Company 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. Providers who enter into such arrangements generally contract with specialists and other secondary providers to provide services not offered by the primary provider. The inability of providers to properly manage costs under capitation arrangements can result in financial instability of such providers and the termination of their relationship with the Company. In addition, payment or other disputes between the primary provider and specialists with whom it contracts can result in a disruption in the provision of services to the Company's members or a reduction in the services available. A primary provider's financial instability or failure to pay secondary providers for services rendered could lead secondary providers to demand payment from the Company, even though the Company has made its regular capitated payments to the primary provider. Depending on state law, the Company could be liable for such claims. In California, the liability of the Company's HMO subsidiaries for unpaid provider claims has not been definitively settled. There can be no assurance that the Company's subsidiaries will not be liable for unpaid provider claims. There can also be no assurance that providers with whom the Company contracts will properly manage the costs of services, maintain financial solvency or avoid disputes with secondary providers, the failure of any of which could have an adverse effect on the provision of services to members and the Company's operations.

    KPC ORGANIZATION.  The Company's California HMO subsidiary, Health Net of California, Inc. was contracted with KPC Medical Management, Inc. (together with its affiliates, the "KPC Organization"), one of the largest provider organizations in Southern California, to provide health care services to approximately 66,000 of its members. During 2000, as the KPC Organization experienced continuing financial difficulties, HN California and other health plans made loans and other financial accommodations to the KPC Organization. Notwithstanding such financial accommodations, the KPC Organization continued to incur losses. In late November, 2000, the KPC Organization filed a petition seeking reorganization under Chapter 11 of the Bankruptcy Code. All of HN California's membership previously assigned to the KPC Organization have now been reassigned to other provider organizations. However, the KPC Organization left unpaid significant provider claims which are unlikely to be discharged to any substantial degree through distribution of proceeds of the bankruptcy estate. Because the bankruptcy of the KPC Organization occurred only in November, 2000, the Company is unable at this time to assess the extent of such unpaid claims. There can be no assurance that the providers will not seek to hold HN California liable for the unpaid claims, or that HN California will not be held liable in any litigation arising therefrom. In the event HN California is held liable for any such unpaid claims, it may have a material adverse effect on the Company's results of operations.

    GOVERNMENT PROGRAMS AND REGULATION.  The Company's business is subject to extensive federal and state laws and regulations, including, but not limited to, financial requirements, licensing requirements, enrollment requirements and periodic examinations by governmental agencies. The laws and rules governing the Company's business and interpretations of those laws and rules are subject to frequent change. Existing or future laws and rules could force the Company to change how it does business and may restrict the Company's revenue and/or enrollment growth, and/or increase its health care and administrative costs, and/or increase the Company's exposure to liability with respect to members, providers or others. In particular, the Company's HMO and insurance subsidiaries are subject to regulations relating to cash reserves, minimum net worth, premium rates, and approval of policy language and benefits. Although such regulations have not significantly impeded the growth of the Company's business to date, there can be no assurance that the Company will be able to continue to obtain or maintain required governmental approvals or licenses or that regulatory changes will not have a material adverse effect on the Company's business. Delays in obtaining or failure to obtain or maintain such approvals, or moratoria imposed by regulatory authorities, could adversely affect the

26

Company's revenue or the number of its members, increase costs or adversely affect the Company's ability to bring new products to market as forecasted. In addition, efforts to enact changes to Medicare could impact the structure of the Medicare program, benefit designs and reimbursement. Changes to the current operation of the Company's Medicare services could have a material adverse affect on the Company's results of operations.

    A significant portion of the Company's revenues relate to federal, state and local government health care coverage programs, such as Medicare, Medicaid and TRICARE programs. Such contracts are generally subject to frequent change including changes which may reduce the number of persons enrolled or eligible, reduce the revenue received by the Company or increase the Company's administrative or health care costs under such programs. In the event government reimbursement were to decline from projected amounts, the Company's failure to reduce the health care costs associated with such programs could have a material adverse effect upon the Company's business. Changes to such government programs in the future may also affect the Company's willingness to participate in such programs.

    The Company is also subject to various federal and state governmental audits and investigations. Such activities could result in the loss of licensure or the right to participate in certain programs, or the imposition of fines, penalties and other sanctions. In addition, disclosure of any adverse investigation or audit results or sanctions could negatively affect the Company's reputation in various markets and make it more difficult for the Company to sell its products and services.

    The amount of government receivables set forth in the Company's financial statements represents the Company's best estimate of the government's liability under Federal Services' TRICARE and other federal government contracts. As of December 31, 2000, the Company's government receivables were approximately $334 million. In December, 2000, the Company's subsidiary, Federal Services, and the United States Department of Defense agreed to a settlement of approximately $389 million for outstanding receivables, of which $60 million was received in December, 2000 and the remainder was received in January, 2001. See "Item 1—Government Contracts Division—TRICARE" for a description of the settlement. In general, government receivables are estimates and subject to government audit and negotiation. In addition, inherent in government contracts are an uncertainty of and vulnerability to government disagreements. Final amounts actually received by the Company under government contracts may be significantly greater or less than the amounts recognized by the Company.

    INTERNET-RELATED OPERATIONS.  The Company believes that the Internet and related new technologies will fundamentally change managed care organizations. The Company's Business Transformation and Innovation Services Division focuses on the strategic direction of the Company in light of the Internet and related technologies and pursues opportunities consistent with such direction. The Division 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 developing business concepts to take advantage of those market opportunities that provide value to consumers, purchasers of benefits and the providers of medical and health care services. See "Business Transformation and Innovation Services Division—Innovation Services" for a description of certain of the Company's Internet initiatives.

    There can be no assurance that the Company will be able to recognize or capitalize on the Internet-related opportunities or technologies that ultimately prove to be accepted and effective within the managed care industry, the provider communities and/or among consumers. There can also be no assurance that new technologies invested in or developed by the Company or its business partners will prove operational; that they will be accepted by consumers, providers or business partners; that they will achieve their intended results; that the Company will recoup its investment in such technologies or related ventures; or that other technologies will not be more accepted or prove more effective. In

27

addition, the Company and its subsidiaries, including Questium, contract with and rely upon third parties for certain content, tools and services. The Company has also contracted to establish links between Company websites and third party websites. Any failure by such third parties to perform in accordance with the terms of their agreements or to comply with applicable law could adversely impact the Company's Internet operations and services, and could expose the Company to liability.

    MEDICAL MANAGEMENT.  The Company's profitability is dependent, to a large extent, upon its ability to accurately project and manage health care costs, including without limitation, appropriate benefit design, utilization review and case management programs, and to secure appropriate risk-sharing arrangements with providers, while providing members with quality health care. For example, high out-of-network utilization of health care providers and services may have significant adverse effects on the Company's ability to manage health care costs and member utilization of health care. There can be no assurance that the Company through its medical management programs will be able to continue to manage medical costs sufficiently to maintain profitability in its product lines.

    MANAGEMENT INFORMATION SYSTEMS.  The Company's business is significantly dependent on effective information systems. The information gathered and processed by the Company's management information systems assists the Company in, among other things, pricing its services, monitoring utilization and other cost factors, processing provider claims, billing its customers on a timely basis and identifying accounts for collection. The Company's customers and providers also depend upon the Company's information systems for membership verification, claims status and other information. The Company has many different information systems for its various businesses and such systems require continual maintenance, upgrading and enhancement to meet the Company's operational needs. Moreover, the merger, acquisition and divestiture activity of the Company requires frequent transitions to or from, and the integration of, various information management systems. The Company is in the process of attempting to reduce the number of its systems, to upgrade and expand its information systems capabilities, and to obtain and develop new, more efficient information systems. Any difficulty associated with the transition to or from information systems, any inability or failure to properly maintain management information systems, or any inability or failure to successfully update or expand processing capability or develop new capabilities in the future in accordance with the Company's business needs, could result in operational disruptions, loss of existing customers and difficulty in attracting new customers, customer and provider disputes, regulatory problems, increases in administrative expenses and/or other adverse consequences. In addition, the Company may, from time-to-time, obtain significant portions of its systems-related or other services or facilities from independent third parties which may make the Company's operations vulnerable to adverse effects if such third parties fail to perform adequately.

    COMPETITION.  The Company competes with a number of other entities in the geographic and product markets in which it operates, some of which other entities may have certain characteristics, capabilities or resources that give them an advantage in competing with the Company. These competitors include HMOs, PPOs, self-funded employers, insurance companies, hospitals, health care facilities and other health care providers. In addition, financial services or other technology-based companies could enter the market and compete with stream-lined administrative functions. The Company believes there are few barriers to entry in these markets, so that the addition of new competitors can readily occur. Certain of the Company's customers may decide to perform for themselves functions or services currently provided by the Company, which could result in a decrease in the Company's revenues. Certain of the Company's providers and suppliers may decide to market products and services to Company customers in competition with the Company. In addition, significant merger and acquisition activity has occurred in the industry in which the Company operates as well as in industries which act as suppliers to the Company such as the hospital, physician, pharmaceutical and medical device industries. This activity may create stronger competitors and/or result in higher health care costs. Provider service organizations may be created by health care providers to offer competing managed care products. To the extent that there is strong competition or that competition intensifies in

28

any market, the Company's ability to retain or increase customers, its revenue growth, its pricing flexibility, its control over medical cost trends and its marketing expenses may all be adversely affected.

    LITIGATION AND INSURANCE.  The Company is subject to a variety of legal actions to which any corporation may be subject, including employment and employment discrimination-related suits, employee benefit claims, breach of contract actions, tort claims, shareholder suits, including for securities fraud, and intellectual property related litigation. In addition, because of the nature of its business, the Company incurs and likely will continue to incur potential liability for claims particularly related to its business, such as failure to pay for or provide health care, poor outcomes for care delivered or arranged, provider disputes, including disputes over withheld compensation, and claims related to self-funded business. Also, there are currently, and may be in the future, attempts to certify certain actions as class actions against various managed care organizations, including the Company, which could expose the Company to significant potential liability or cause the Company to make operational changes. In some cases, substantial non-economic or punitive damages are being sought. While the Company currently has insurance coverage for some of these potential liabilities, others may not be covered by insurance (such as punitive damages), the insurers may dispute coverage or the amount of insurance may not be sufficient to cover the damages awarded. In addition, insurance coverage for all or certain forms of liability may become unavailable or prohibitively expensive in the future.

    ADMINISTRATION AND MANAGEMENT.  The level of administrative expense is a partial determinant of the Company's profitability. While the Company attempts to effectively manage such expenses, including the development of online functionalities and resources designed to create administrative efficiencies, increases in staff-related and other administrative expenses may occur from time to time due to business or product start-ups or expansions, growth or changes in business, acquisitions, regulatory requirements, including compliance with HIPAA regulations, or other reasons. Such expense increases are not clearly predictable and increases in administrative expenses may adversely affect results.

    The Company currently believes it has a relatively experienced, capable management staff. Loss of certain managers or a number of such managers could adversely affect the Company's ability to administer and manage its business.

    LOSS RESERVES.  The Company's loss reserves are estimates of future costs based on various assumptions. The accuracy of these estimates may be affected by external forces such as changes in the rate of inflation, the regulatory environment, the judicious administration of claims, medical costs and other factors. Included in the loss reserves are estimates for the costs of services which have been incurred but not reported. Estimates are continually monitored and reviewed and, as settlements are made or estimates adjusted, differences are reflected in current operations. Such estimates are subject to the impact of changes in the regulatory environment and economic conditions. Given the inherent variability of such estimates, the actual liability could differ significantly from the amounts reserved. Moreover, if the assumptions on which the estimates are based prove to be incorrect and reserves are inadequate to cover the Company's actual experience, the Company's financial condition could be adversely affected.

    FINANCING CONDITIONS.  The Company has an unsecured, five-year $1.5 billion revolving credit facility pursuant to a Credit Agreement dated July 8, 1997 with the banks identified in the Credit Agreement and Bank of America, N.A. National Trust and Savings Association as Administrative Agent. The Credit Agreement will expire in July, 2002. Accordingly, the Company is considering its financing alternatives, including renewing the current revolving credit facility, obtaining a new credit facility and pursuing a public debt offering. The ability of the Company to obtain any financing, whether through renewal of the current credit facility, obtaining a new credit facility, issuing public debt or otherwise, and the terms of any such financing are dependent on, among other things, the Company's financial condition, financial market conditions within the Company's industry and

29

generally, credit ratings and numerous other factors. There can be no assurance that the Company will be able to renew its current credit facility prior to its expiration, or obtain a new credit facility, on terms similar to its current credit facility or on favorable terms, if at all, or initiate and complete a public debt offering or otherwise obtain financing on such terms or within such time period acceptable to the Company, if at all. Failure to renew the current credit facility prior to its expiration or to otherwise obtain financing on terms and within such time period acceptable to the Company could, in addition to other negative effects, have a material adverse effect on the Company's operations, financial condition and ability to compete or comply with regulatory requirements.

    MARKETING.  The Company markets its products and services through both employed sales people and independent sales agents. Although the Company has a number of such sales employees and agents, if certain key sales employees or agents or a large subset of such individuals were to leave the Company, its ability to retain existing customers and members could be impaired. In addition, certain of the Company's customers or potential customers consider rating, accreditation or certification of the Company by various private or governmental bodies or rating agencies necessary or important. Certain of the Company's health plans or other business units may not have obtained or may not desire or be able to obtain or maintain such accreditation or certification, which could adversely affect the Company's ability to obtain or retain business with such customers.

    The managed health care industry has recently received a significant amount of negative publicity. Such general publicity, or any negative publicity regarding the Company in particular, could adversely affect the Company's ability to sell its products or services, could require changes to the Company's products or services, or could stimulate additional regulation that adversely affects the Company. In this connection, certain of the Company's subsidiaries have experienced significant negative enrollment trends in certain lines of business. Furthermore, the managed care industry recently has experienced significant merger and acquisition activity. Speculation, uncertainty or negative publicity about the Company or certain of its lines of business could adversely affect the ability of the Company to market its products.

    POTENTIAL DIVESTITURES.  In 1999, the Company substantially completed a program to divest certain non-core assets. There can be no assurance that, having divested such non-core operations, the Company will be able to achieve greater profitability, or any profitability, strengthen its core operations or compete more effectively in its existing markets. In January, 2001, the Company entered into a definitive agreement to sell its Florida health plan, subject to certain regulatory approvals and other customary closing conditions. In addition, 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, if any, of its businesses or operations should be divested. Entering into, evaluating or consummating divestiture transactions, including the Company's pending sale of its Florida health plan, may entail certain risks and uncertainties in addition to those which may result from any such change in the Company's business operations, including but not limited to extraordinary transaction costs, unknown indemnification liabilities or unforeseen administrative complications, any of which could result in reduced revenues, increased charges, post-transaction administrative costs or could otherwise have a material adverse effect on the Company's business, financial condition or results of operations. See "Divestitures."

    MANAGEMENT OF GROWTH.  The Company made several large acquisitions in the recent past, including acquiring Physicians Health Services, Inc., and continues to explore acquisition opportunities. Failure to effectively integrate acquired operations could result in increased administrative costs or customer confusion or dissatisfaction. The Company may also not be able to manage this growth effectively, including not being able to continue to develop processes and systems to support growing operations.

    STOCK MARKET.  Recently, the market prices of the securities of certain of the publicly-held companies in the industry in which the Company operates have shown volatility and sensitivity in

30

response to many factors, including public communications regarding managed care, legislative or regulatory actions, litigation or threatened litigation, health care cost trends, pricing trends, competition, earning or membership reports of particular industry participants, and acquisition activity. There can be no assurances regarding the level or stability of the Company's share price at any time or the impact of these or any other factors on the share price.

RECENT DEVELOPMENTS

    NAME CHANGE.  On November 3, 2000, the Company changed its name from Foundation Health Systems, Inc. to Health Net, Inc. and changed its ticker symbol on the New York Stock Exchange (effective November 6, 2000) from "FHS" to "HNT." The Company accomplished the name change by merging a wholly-owned subsidiary, HNI Shell, Inc., with and into the Company and, in connection with such merger, amending its Fourth Amended and Restated Certificate of Incorporation to change the Company name to Health Net, Inc. Prior to such name change, the Company's California HMO subsidiary changed its name from Health Net to Health Net of California, Inc.

    FLORIDA OPERATIONS.  In January, 2001, the Company entered into a definitive agreement to sell its Florida health plan for $48 million, consisting of $23 million in cash and $25 million in a secured five-year note bearing 8% interest. Although the Company has entered into a definitive agreement for the sale, consummation of the sale is subject to various conditions and certain regulatory approvals. The Company anticipates closing the sale by June 30, 2001. The Company also agreed to sell the corporate facility building used by its Florida health plan under defined terms which require the Company to finance the sale over five years.

    OHIO, WEST VIRGINIA AND WESTERN PENNSYLVANIA OPERATIONS.  In 2000, the Company decided to exit the Ohio, West Virginia and Western Pennsylvania markets in which it operated. In this connection, the Company provided notice of intention to withdraw from such service areas to the appropriate regulators. As of February, 2001, the Company no longer had any members in the OH/WV/WPA markets. Upon completion of its withdrawal efforts, the Company intends to dissolve its subsidiaries operating in such markets and to recover any remaining capital.

    KPC ORGANIZATION.  HN California was contracted with the KPC Organization, one of the largest provider organizations in Southern California, to provide health care services to approximately 66,000 of its members. During 2000, as the KPC Organization experienced continuing financial difficulties, HN California and other health plans made loans and other financial accommodations to the KPC Organization. Notwithstanding such financial accommodations, the KPC Organization continued to incur losses. In late November, 2000, the KPC Organization filed a petition seeking reorganization under Chapter 11 of the Bankruptcy Code. All of HN California's membership previously assigned to the KPC Organization have now been reassigned to other provider organizations. However, the KPC Organization left unpaid significant provider claims which are unlikely to be discharged to any substantial degree through distribution of proceeds of the bankruptcy estate. Accordingly, there is the possibility that HN California will be at risk for the unpaid portion of those provider claims. Because the bankruptcy of the KPC Organization occurred only in November, 2000, the Company is unable at this time to assess the extent of such unpaid claims, the extent to which such providers may seek to hold the Company liable for such unpaid claims, or the probability that the Company will be held liable in any litigation arising therefrom.

    FHC MERGER.  Effective January 1, 2001, the Company merged its wholly-owned subsidiary, Foundation Health Corporation, with and into the Company, thereby terminating the separate existence of Foundation Health Corporation.

    REAL ESTATE TRANSACTION.  In 1995, the Company entered into a five year tax retention operating lease ("TROL") for the construction of various health care centers and a corporate facility. Expiration of the TROL was extended from May, 2000 to September, 2000. In September, 2000, the Company settled its obligations under the TROL and purchased the leased properties for $35.4 million. The leased properties consisted of three health care centers and a corporate facility. The health care centers serve as rental properties and the corporate facility is used in the Company's operations.

31

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

    The following table sets forth the high and low sales prices of the Company's Class A Common Stock, par value $.001 per share (the "Class A Common Stock"), on The New York Stock Exchange, Inc. ("NYSE") since January 4, 1999.

		HIGH		LOW
Calendar Quarter—1999
	First Quarter	12	7/16	7	11/16
	Second Quarter	20	1/16	10	13/16
	Third Quarter	16	15/16	8	7/8
	Fourth Quarter	10	1/2	6	1/4
Calendar Quarter—2000
	First Quarter	11	11/16	7	5/8
	Second Quarter	14	11/16	7	11/16
	Third Quarter	18	9/16	13	1/4
	Fourth Quarter	26	15/16	15	9/16
Calendar Quarter—2001
	First Quarter (through March 7, 2001)	26	3/16	18

    On March 7, 2001, the last reported sales price per share of the Class A Common Stock was $21.08 per share.

DIVIDENDS

    No dividends have been paid by the Company during the preceding two fiscal years. The Company has no present intention of paying any dividends on its Common Stock.

    The Company is a holding company and, therefore, its ability to pay dividends depends on distributions received from its subsidiaries, which are subject to regulatory net worth requirements and certain additional state regulations which may restrict the declaration of dividends by HMOs, insurance companies and licensed managed health care plans. The payment of any dividend is at the discretion of the Company's Board of Directors and depends upon the Company's earnings, financial position, capital requirements and such other factors as the Company's Board of Directors deems relevant.

    Under the Credit Agreement entered into on July 8, 1997 with Bank of America as agent, the Company cannot declare or pay cash dividends to its stockholders or purchase, redeem or otherwise acquire shares of its capital stock or warrants, rights or options to acquire such shares for cash except to the extent permitted under such Credit Agreement as described elsewhere in this Annual Report on Form 10-K.

HOLDERS

    As of March 7, 2001, there were approximately 1,700 holders of record of Class A Common Stock.

ITEM 6. SELECTED FINANCIAL DATA

    The information required by this Item is set forth in the Company's Annual Report to Stockholders on page 2, and is incorporated herein by reference and made a part hereof.

32

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    The information required by this Item is set forth in the Company's Annual Report to Stockholders on pages 19 through 27, and is incorporated herein by reference and made a part hereof.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    The information required by this Item is set forth in the Company's Annual Report to Stockholders on page 27, and is incorporated herein by reference and made a part hereof.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The information required by this Item is set forth in the Company's Annual Report to Stockholders on pages 28 through 56, and is incorporated herein by reference and made a part hereof.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

    Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The information required by this Item is set forth in the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days of December 31, 2000. Such information is incorporated herein by reference and made a part hereof.

ITEM 11. EXECUTIVE COMPENSATION

    The information required by this Item is set forth in the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days of December 31, 2000. Such information is incorporated herein by reference and made a part hereof.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The information required by this Item is set forth in the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days of December 31, 2000. Such information is incorporated herein by reference and made a part hereof.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The information required by this Item is set forth in the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days of December 31, 2000. Such information is incorporated herein by reference and made a part hereof.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)

FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS

33

1. FINANCIAL STATEMENTS

    The following consolidated financial statements are incorporated by reference into this Annual Report on Form 10-K from pages 28 to 56 of the Company's Annual Report to Stockholders for the year ended December 31, 2000:

Report of Deloitte & Touche LLP

Consolidated balance sheets at December 31, 2000 and 1999

Consolidated statements of operations for each of the three years in the period ended December 31, 2000

Consolidated statements of stockholders' equity for each of the three years in the period ended December 31, 2000

Consolidated statements of cash flows for each of the three years in the period ended December 31, 2000

    Notes to consolidated financial statements

2. FINANCIAL STATEMENT SCHEDULE

    The following financial statement schedule and accompanying report thereon are filed as a part of this Annual Report on Form 10-K:

    Report of Deloitte & Touche LLP

    Schedule II—Valuation and Qualifying Accounts and Reserves

    All other schedules are omitted because they are not applicable, not required or because the required information is included in the consolidated financial statements or notes thereto which are incorporated by reference into this Annual Report on Form 10-K from the Company's 2000 Annual Report to Stockholders.

3. EXHIBITS

    The following exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference:

2.1	Agreement and Plan of Merger, dated October 1, 1996, by and among Health Systems International, Inc., FH Acquisition Corp. and Foundation Health Corporation (filed as Exhibit 2.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996, which is incorporated by reference herein).
3.1	Fourth Amended and Restated Certificate of Incorporation of the Company (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8 (File No. 333-24621), which is incorporated by reference herein).
+3.2	Certificate of Ownership and Merger, which amends the Fourth Amended and Restated Certificate of Incorporation, a copy of which is filed herewith.
+3.3	Sixth Amended and Restated Bylaws of the Company, a copy of which is filed herewith.
4.1	Form of Class A Common Stock Certificate (included as Exhibit 4.2 to the Company's Registration Statements on Forms S-1 and S-4 (File nos. 33-72892 and 33-72892-01, respectively), which is incorporated by reference herein).

34

4.2	Rights Agreement dated as of June 1, 1996 by and between the Company and Harris Trust and Savings Bank, as Rights Agent (filed as Exhibit 99.1 to the Company's Registration Statement on Form 8-A (File No. 001-12718), which is incorporated by reference herein).
4.3	First Amendment to the Rights Agreement dated as of October 1, 1996, by and between the Company and Harris Trust and Savings Bank, as Rights Agent (filed as Exhibit 10.40 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996, which is incorporated by reference herein).
*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 by reference herein).
*10.2	Letter Agreement dated June 25, 1998 between B. Curtis Westen and the Company (filed as Exhibit 10.73 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, which is incorporated by reference herein).
*10.3	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 22, 2000 (filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, which is incorporated herein by reference).
*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 10-Q 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 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).
*10.9	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).
*10.10	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).
+*10.11	Form of Agreement amending Severance Payment Agreement by and between the Company and various of its executive officers, a copy of which is filed herewith.
*10.12	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).

35

*10.13	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).
*10.14	The Company's Second Amended and Restated 1991 Stock Option Plan (filed as Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000), which is incorporated herein by reference.
+*10.15	Amendment to the Company's Second Amended and Restated 1991 Stock Option Plan, a copy of which is filed herewith.
*10.16	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.
+*10.17	Amendment to the Company's 1997 Stock Option Plan, a copy of which is filed herewith.
*10.18	The Company's Amended and Restated 1998 Stock Option Plan (filed as Exhibit 10.18 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000), which is incorporated herein by reference.
+*10.19	Amendments to the Company's Amended and Restated 1998 Stock Option Plan, a copy of which is filed herewith.
*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, as amended (filed as Exhibit 10.22 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, which is incorporated herein by reference).
*10.23	The Company's Executive Officer Incentive Plan (filed as Annex A to the Company's Definitive Proxy Statement filed on March 21, 2000, which is incorporated herein be reference).
+*10.24	The Company's 401(k) Associate Savings Plan, as amended and restated, a copy of which is filed herewith.
*10.25	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).
*10.26	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).
*10.27	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).

36

*10.28	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).
*10.29	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).
*10.30	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).
*10.31	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).
*10.32	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).
10.33	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).
10.34	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).
10.35	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).
10.36	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).
10.37	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).
10.38	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).
10.39	Fifth Amendment to Credit Agreement, dated as of September 20, 2000,among the Company, Bank of America National Trust and Savings Association and the Banks, as defined therein (filed as Exhibit 10.45 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, which is incorporated herein by reference).

37

10.40	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).
10.41	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).
10.42	Lease Agreement between HAS-First Associates and FHC dated August 1, 1998 and form of amendment thereto (filed as an exhibit to FHC's Registration Statement on Form S-1 (File No. 33-34963), which is incorporated herein by reference).
10.43	Office Lease dated September 20, 2000 by and among Health Net of California, Inc., DCA Homes, Inc. and Lennar Rolling Ridge, Inc. (filed as Exhibit 10.46 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, which is incorporated herein by reference).
11.1	Statement relative to computation of per share earnings of the Company (included in Note 2 to the Financial Statements, which is incorporated herein by reference from pages 35 to 38 of the Annual Report to Stockholders for the year ended December 31, 2000).
+13.1	Selected portions of the 2000 Annual Report to Stockholders, a copy of which portions are filed herewith.
+21.1	Subsidiaries of the Company, a copy of which is filed herewith.
+23.1	Consent of Deloitte & Touche LLP, a copy of which is filed herewith.

*

Management contract or compensatory plan or arrangement required to be filed (and/or incorporated by reference) as an exhibit to this Annual Report on Form 10-K pursuant to Item 14(c) of Form 10-K.

+

A copy of the exhibit is being filed with this Annual Report on Form 10-K.

(b)

Reports on Form 8-K

    In connection with the Company's name change from Foundation Health Systems, Inc. to Health Net, Inc., the Company filed a current report on Form 8-K with the Securities and Exchange Commission on November 6, 2000.

38

INDEPENDENT AUDITORS' REPORT ON SCHEDULE

     To the Board of Directors and Stockholders of
Health Net, Inc.
Woodland Hills, California

    We have audited the consolidated financial statements of Health Net, Inc. (the "Company") as of December 31, 2000 and 1999 and for each of the three years in the period ended December 31, 2000, and have issued our report thereon dated February 20, 2001, appearing in and incorporated by reference in this Annual Report on Form 10-K of Health Net, Inc. for the year ended December 31, 2000. Our audits also included the financial statement schedule of Health Net, Inc., listed in Item 14(a) (2). The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Deloitte & Touche LLP
Los Angeles, California
February 20, 2001

39

SUPPLEMENTAL SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
HEALTH NET, INC.

(Amounts in thousands)

		Balance at beginning of period		Charged to costs and expenses		Charged to other accounts(1)			Deductions(2)			Balance at end of period
2000:
Allowance for doubtful accounts:
	Premiums receivable	$	21,937	$	13,779	$	(15,894	)	$	—		$	19,822
1999:
Allowance for doubtful accounts:
	Premiums receivable	$	28,522		13,323		(7,002	)		(12,906	)		21,937
1998:
Allowance for doubtful accounts:
	Premiums receivable	$	22,900		10,959		(5,337	)		—			28,522

(1)

Written off (credited) to asset accounts on the Consolidated Balance Sheets.

(2)

The credit for 1999 is the result of the sale of certain of the company's subsidiaries.

40

SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Company has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized, on the 30^th day of March, 2001.

HEALTH NET, INC.
By:	/s/ JAY M. GELLERT Jay M. Gellert President and Chief Executive Officer (Principal Executive Officer)
By:	/s/ STEVEN P. ERWIN Steven P. Erwin Executive Vice President and Chief Financial Officer (Principal Accounting and Financial Officer)

    Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Company and in the capacities indicated on the 30^th day of March, 2001.

SIGNATURE	TITLE	DATE
/s/ J. THOMAS BOUCHARD J. Thomas Bouchard	Director	March 30, 2001
/s/ GEORGE DEUKMEJIAN Gov. George Deukmejian	Director	March 30, 2001
/s/ THOMAS T. FARLEY Thomas T. Farley	Director	March 30, 2001
/s/ GALE S. FITZGERALD Gale S. Fitzgerald	Director	March 30, 2001
/s/ PATRICK FOLEY Patrick Foley	Director	March 30, 2001

41

/s/ JAY M. GELLERT Jay M. Gellert	Director	March 30, 2001
/s/ ROGER F. GREAVES Roger F. Greaves	Director	March 30, 2001
/s/ RICHARD W. HANSELMAN Richard W. Hanselman	Director	March 30, 2001
/s/ RICHARD J. STEGEMEIER Richard J. Stegemeier	Director	March 30, 2001
/s/ RAYMOND S. TROUBH Raymond S. Troubh	Director	March 30, 2001
/s/ BRUCE G. WILLISON Bruce G. Willison	Director	March 30, 2001

42

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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
DOCUMENTS INCORPORATED BY REFERENCE
PART I

ITEM 1. BUSINESS
HEALTH PLAN DIVISIONS
GOVERNMENT CONTRACTS DIVISION
SPECIALTY SERVICES DIVISION
BUSINESS TRANSFORMATION AND INNOVATION SERVICES DIVISION
PROVIDER RELATIONSHIPS AND RESPONSIBILITIES
DIVESTITURES

ADDITIONAL INFORMATION CONCERNING THE COMPANY'S BUSINESS
SERVICE MARKS
EMPLOYEES
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
SUPERIOR NATIONAL INSURANCE GROUP, INC.
FPA MEDICAL MANAGEMENT, INC.
BAJA INC. V. LOS ANGELES MEDICAL MANAGEMENT CORP., EAST LOS ANGELES DOCTORS HOSPITAL FOUNDATION, INC.
ROMERO (FORMERLY PAY) V. FOUNDATION HEALTH SYSTEMS, INC.
SHANE V. FOUNDATION HEALTH SYSTEMS, INC.
STATE OF CONNECTICUT V. PHYSICIANS HEALTH SERVICES, INC.
ALBERT V. PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC.
CALIFORNIA MEDICAL ASSOCIATION V. BLUE CROSS OF CALIFORNIA, INC., PACIFICARE HEALTH SYSTEMS, INC., PACIFICARE OPERATIONS, INC. AND FOUNDATION HEALTH SYSTEMS, INC.
CONNECTICUT STATE MEDICAL SOCIETY V. PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC.
KEVIN LYNCH, M.D. AND KAREN LAUGEL, M.D. V. PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC.

LEONARD KLAY, M.D. V. PRUDENTIAL INS CO OF AMERICA, UNITED HEALTHCARE, AETNA, INC., AETNA US HEALTHCARE, CIGNA CORP., CONNECTICUT GENERAL CORP., FOUNDATION HEALTH SYSTEMS, INC., PACIFICARE HEALTH SYSTEMS AND WELLPOINT HEALTH NETWORKS, INC.
MISCELLANEOUS PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
OTHER INFORMATION
REVOLVING CREDIT FACILITY
SHAREHOLDER RIGHTS PLAN
CAUTIONARY STATEMENTS
RECENT DEVELOPMENTS

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
DIVIDENDS
HOLDERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS
2. FINANCIAL STATEMENT SCHEDULE
3. EXHIBITS

INDEPENDENT AUDITORS' REPORT ON SCHEDULE
SUPPLEMENTAL SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES HEALTH NET, INC. (Amounts in thousands)
SIGNATURES

EX-3.2

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Exhibit 3.2

CERTIFICATE OF OWNERSHIP AND MERGER
OF
HNI SHELL, INC.
INTO
FOUNDATION HEALTH SYSTEMS, INC.

Pursuant to Section 253(a) of the General Corporation Law of the State of Delaware

    Foundation Health Systems, Inc., a Delaware corporation, does hereby certify to the following facts relating to the merger of HNI Shell, Inc. into Foundation Health Systems, Inc. (the "Merger"):

    FIRST:  The names and states of incorporation of the constituent corporations to the Merger are as follows:

Name	State
HNI Shell, Inc.	Delaware
Foundation Health Systems, Inc.	Delaware

    SECOND:  Foundation Health Systems, Inc. is the owner of all of the issued and outstanding shares of the capital stock of HNI Shell, Inc.

    THIRD:  The Board of Directors of Foundation Health Systems, Inc., by resolutions duly adopted at a meeting held on June 29, 2000 (true and correct copies of which are attached hereto as Exhibit A), has authorized the Merger in accordance with Section 253 of the General Corporation Law of the State of Delaware. Such resolutions have not been modified or rescinded and are in full force and effect on the date hereof.

    FOURTH:  Effective September 29, 2000, the Board of Directors of HNI Shell, Inc. approved and adopted resolutions authorizing the Merger in accordance with Section 253 of the General Corporation Law of the State of Delaware.

    FIFTH:  Foundation Health Systems, Inc. shall be the surviving corporation of the Merger (the "Surviving Corporation").

    SIXTH:  The current Certificate of Incorporation of Foundation Health Systems, Inc. shall be the Certificate of Incorporation of the Surviving Corporation, except that, at the effective time of the Merger, Article First shall be amended to change the name of the Surviving Corporation from Foundation Health Systems, Inc. to Health Net, Inc.

    SEVENTH:  The Merger shall become effective at 5:00 p.m. (Delaware time) on November 3, 2000.

    IN WITNESS WHEREOF, Foundation Health Systems, Inc. has caused this Certificate of Ownership and Merger to be executed in its corporate name this 25^th day of October, 2000.

FOUNDATION HEALTH SYSTEMS, INC.
By:	/s/ B. CURTIS WESTEN B. Curtis Westen, Esq. Secretary

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Exhibit 3.2
CERTIFICATE OF OWNERSHIP AND MERGER OF HNI SHELL, INC. INTO FOUNDATION HEALTH SYSTEMS, INC.

EX-3.3

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Exhibit 3.3

SIXTH AMENDED AND
RESTATED BYLAWS
OF
HEALTH NET, INC.

ARTICLE I

OFFICES

    Section 1  Registered Office.  The registered office of Health Net, Inc. (the "Corporation") in the State of Delaware shall be at Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of the Corporation's registered agent at such address is The Corporation Trust Corporation.

    Section 2  Executive Offices.  The Corporation will maintain its executive offices in such location as may be determined by the Corporation's board of directors (the "Board of Directors").

    Section 3  Other Offices.  The Corporation may also have an office or offices and keep the books and records of the Corporation, except as may otherwise be required by law, at such other place or places, either within or outside of the State of Delaware, as the Board of Directors may from time to time determine or as the business of the Corporation requires.

ARTICLE II

MEETINGS OF STOCKHOLDERS

    Section 1  Place of Meeting.  Meetings of stockholders shall be held at any place within or outside the State of Delaware designated by the Board of Directors. In the absence of any such designation by the Board of Directors, stockholders' meetings shall be held at the principal executive office of the Corporation.

    Section 2  Annual Meetings.  The annual meeting of the Stockholders for the election of directors and for the transaction of such other business as may properly come before such meeting shall be held on the second Friday of May each year at 10:00 a.m., if not a legal holiday under the laws of the place where such meeting is to be held, and if a legal holiday, then on the next succeeding day not a legal holiday under the laws of that place, or on such other date and at such hour as may be fixed from time to time by a majority of the Board of Directors.

    Section 3  Special Meetings.  Subject to the rights of the holders of any class or series of stock having a preference over the Corporation's common stock (the "Common Stock") as to dividends or upon liquidation, special meetings of the Stockholders for any purpose or purposes may be called only by a majority of the entire Board of Directors. Only the business specified in the notice of any special meeting of the Stockholders shall come before such meeting.

    Section 4  Notice of Meetings.  Written notice of each meeting of the Stockholders, whether annual or special, shall be given, either by personal delivery or by mail, not less than 10 days nor more than 60 days before the date of such meeting to each Stockholder of record entitled to notice of the meeting. If mailed, the notice shall be deemed to be given when deposited in the United States of America mail, postage prepaid, directed to the Stockholder at the Stockholder's address as it appears on the records of the Corporation. Each notice shall state the place, date and hour of the meeting and the purpose or purposes for which the meeting is called.

    Notice of any meeting of Stockholders shall be deemed waived by any Stockholder who shall attend the meeting in person or by proxy without protesting, prior to or at the commencement of the meeting, the lack of proper notice or who shall waive notice thereof as provided in Article X of these Bylaws. Notice of adjournment of a meeting of Stockholders need not be given if the time and place to which it is adjourned are announced at the meeting, unless the adjournment is for more than 30 days or, after adjournment, a new record date is fixed for the adjourned meeting.

    Section 5  Quorum.  The holders of a majority of the votes entitled to be cast by the Stockholders entitled to vote, which if any vote is to be taken by classes shall mean the holders of a

2

majority of the votes entitled to be cast by the Stockholders of each class, present in person or by proxy, shall constitute a quorum for the transaction of business at any meeting of the Stockholders.

    Section 6  Adjournments.  In the absence of a quorum, the holders of a majority of the votes entitled to be cast by the Stockholders, present in person or by proxy, may adjourn the meeting from time to time. Whether or not a quorum is present at such meeting, the chairman of the meeting may adjourn the meeting from time to time. At any adjourned meeting at which a quorum may be present, any business may be transacted which might have been transacted at the meeting as originally called.

    Section 7  Order of Business.  At each meeting of the Stockholders, the Chairman of the Board, or, in his absence, such person designated by the Board of Directors, shall act as chairman.

    Section 8  List of Stockholders.  It shall be the duty of the Secretary or other officer of the Corporation who has charge of the stock ledger to prepare and make, at least 10 days before each meeting of the Stockholders, a complete list of the Stockholders entitled to vote thereat, arranged in alphabetical order, and showing the address of each Stockholder and the number of shares registered in the Stockholder's name. The list shall be produced and kept available at the times and places required by law.

    Section 9  Voting.  Each Stockholder of record of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation shall be entitled at each meeting of the Stockholders to that number of votes for each share of the stock as may be fixed in the Corporation's Certificate of Incorporation (the "Certificate of Incorporation") or in the resolution or resolutions adopted by the Board of Directors providing for the issuance of the stock. Unless specifically provided otherwise in the Certificate of Incorporation or in resolutions adopted by the Board of Directors providing for the issuance of a class or series of Common Stock, each Stockholder of record of Common Stock shall be entitled at each meeting of the Stockholders to one vote for each share of the stock registered in that Stockholder's name on the books of the Corporation:

    (a) on the date fixed pursuant to Section 7.6 of Article VII of these Bylaws as the record date for the determination of Stockholders entitled to notice of and to vote at the meeting; or

    (b) if no record date shall have been fixed, then at the close of business on the day next preceding the day on which notice of the meeting is given, or if notice is waived, then at the close of business on the day next preceding the day on which the meeting is held.

    Each Stockholder entitled to vote at any meeting of the Stockholders may authorize not in excess of three persons to act for the Stockholder by a proxy signed by the Stockholder or the Stockholder's attorney-in-fact. Any proxy shall be delivered to the Secretary of the Corporation at or prior to the time designated for holding the meeting, but in any event not later than the time designated in the order of business for so delivering proxies. No proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period.

    Except as provided in the Certificate of Incorporation, at each meeting of the Stockholders, all corporate actions to be taken by vote of the Stockholders shall be authorized by a majority of the votes cast by the Stockholders entitled to vote thereon, present in person or represented by proxy, and where a separate vote by class is required, a majority of the votes cast by the Stockholders of that class, present in person or represented by proxy, shall be the act of the class.

    Unless required by law or determined by the chairman of the meeting to be advisable, the vote on any matter, including the election of directors, need not be by written ballot, In the case of a vote by written ballot, each ballot shall be signed by the Stockholder voting, or by the Stockholder's proxy, and shall state the number of shares voted.

    Section 10  Inspectors.  Either the Board of Directors or, in the absence of designation of inspectors by the Board of Directors, the chairman of the meeting of the Stockholders may, in its or such person's discretion, appoint one or more inspectors to act at any meeting of the Stockholders. The

3

inspectors shall perform such duties as shall be specified by the Board of Directors or the chairman of the meeting. Inspectors need not be Stockholders. No director or nominee for the office of director shall be appointed as an inspector.

    Section 11  Consent in Lieu of Meeting.  Notwithstanding anything contained in these Bylaws to the contrary, no action required or permitted to be taken at any meeting of Stockholders of this Corporation may be taken by written consent without a meeting of Stockholders.

ARTICLE III

BOARD OF DIRECTORS

    Section 1  General Powers.  The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, which may exercise all powers of the Corporation and do all lawful acts and things as are not by law or by the Certificate of Incorporation directed or required to be exercised or done by the Stockholders.

    Section 2  Number, Qualification and Election. The Board of Directors shall consist of not less than three (3) nor more than twenty (20) directors, the exact number of which shall be fixed from time to time by the Board of Directors. A majority of the directors comprising the Board of Directors shall be Independent Directors (as defined below).

    Each of the directors of the Corporation shall hold office for the term for which he is elected and until (i) his successor has been elected and qualified or (ii) his earlier death, resignation or removal. The directors of the Corporation shall be classified, with respect to the time for which they hold office, into three classes as nearly equal in number as possible: Class I whose term expires at the annual meeting of Stockholders held in 1997, Class II whose term expires at the annual meeting of Stockholders held in 1998 and Class III whose term expires at the annual meeting of Stockholders held in 1999, with each class to hold office until its successors are elected and qualified. If the number of directors is changed by the Board of Directors, then any newly created directorships or any decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal as possible; provided that no decrease in the number of directors shall shorten the term of any incumbent director. At each annual meeting of the Stockholders, subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, the successors of the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of Stockholders held in the third year following the year of their election.

    Directors need not be Stockholders.  In any election of directors, the persons receiving a plurality of the votes cast, up to the number of directors to be elected in such election, shall be deemed to be elected.

    Directors shall be deemed to have retired and resigned from the Board of Directors effective immediately prior to the first annual meeting of stockholders of the Corporation occurring after such Director attains seventy-two years of age, provided, however, that members of the Board of Directors on February 4, 1999 shall be deemed to have retired and resigned from the Board of Directors effective upon the date of the first annual meeting of stockholders of the Corporation occurring after such Director attains seventy-five years of age.

    For the purposes of these Bylaws, the term "Independent Director" shall mean a director who:

(a)

is not currently employed by the Corporation in an executive capacity;

(b)

is not, and is not affiliated with a company or firm that is an advisor or consultant to the Corporation;

4

(c)

has no personal services contract(s) with the Corporation or the Corporation's senior management, unless such a contract has been approved by a majority of the Independent Directors for a special engagement for a limited period of time;

(d)

is not an officer, director, employee or paid consultant of a not-for-profit entity that receives significant contributions from the Corporation;

(e)

within the last year, has not had any business relationship with the Corporation that the Corporation has been required to disclose under the Securities and Exchange Commission disclosure regulations, unless a majority of the Independent Directors determine that such business relationship is not material to the Corporation and does not interfere with the exercise of the director's independent judgment;

(f)

is not employed by a public company at which an executive officer of the Corporation serves as a director;

(g)

has not had a relationship described in (a) through (f) above with any affiliate of the Corporation; and

(h)

is not a member of the immediate family of any person described in (a) through (g) above.

    Section 3  Notification of Nominations.  Subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, nominations for the election of directors shall be made by the Committee on Directors as provided in Article IV, Section 4.4, or by any Stockholder entitled to vote for the election of directors.

    A Stockholder's nomination shall be made by giving timely notice in proper written form thereof to the Secretary of the Corporation. To be timely, a Stockholder's notice shall be delivered to or mailed and received at the executive offices of the Corporation not less than 60 calendar days nor more than 90 calendar days prior to the meeting; provided that, in the event that less than 40 calendar days' notice or prior public disclosure of the date of the meeting is given or made to the Stockholders, notice by the Stockholder to be timely must be so received not later than the close of business on the tenth calendar day following the day on which the notice of the date of the meeting was mailed or public disclosure was made.

    To be in proper written form, a Stockholder's notice shall set forth in writing: (i) as to each person whom the Stockholder proposes to nominate for election as a director, all information relating to that person that is required to be disclosed in solicitations of proxies for the election of directors or is otherwise required, in each case pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, including, but not limited to, the person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected; and (ii) as to the Stockholder giving the notice, (w) the name and record address, as they appear on the Corporation's books, of the Stockholder, (x) the class and number of shares of stock of the Corporation which are owned beneficially or of record by the Stockholder, (y) a description of all arrangements or understandings between the Stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nominations are to be made by the Stockholder and (z) a representation that the Stockholder intends to appear in person or by proxy at the meeting to nominate the persons named in the notice. At the request of the Board of Directors, any person nominated by the Committee on Directors for election as a director shall furnish to the Secretary of the Corporation the information required to be set forth in a Stockholder's notice of nomination which pertains to the nominee.

    In the event that a Stockholder seeks to nominate one or more directors, the Secretary shall appoint an inspector, who shall not be affiliated with the Corporation, to determine whether the Stockholder has complied with this Section 3.3. If the inspector shall determine that the Stockholder has not complied with this Section 3.3, then the inspector shall direct the chairman of the meeting to

5

declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and the chairman shall so declare to the meeting and the defective nomination shall be disregarded.

    Section 4  Quorum and Manner of Acting.  Except as may otherwise be provided by these Bylaws or the Certificate of Incorporation, a majority of the entire Board of Directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, and the vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. In the absence of a quorum, a majority of the directors present may adjourn the meeting to another time and place. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called.

    Section 5  Place of Meeting.  The Board of Directors may hold its meetings, both regular and special, at such place or places within or without the State of Delaware as the Board of Directors may from time to time determine, or as shall be specified or fixed in the respective notices or waivers of notice thereof.

    Section 6  Regular Meetings.  Regular meetings of the Board of Directors shall be held at such times as the Board of Directors shall from time to time by resolution determine. If any day fixed for a regular meeting shall be a legal holiday under the laws of the place where the meeting is to be held, then the meeting which would otherwise be held on that day shall be held at the same hour on the next succeeding business day.

    Section 7  Special Meetings.  Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board or by a majority of the Board of Directors.

    Section 8  Notice of Meetings.  Notice of regular meetings of the Board of Directors or of any adjourned meeting thereof need not be given. Notice of each special meeting of the Board of Directors shall be mailed to each director, addressed to the director at the director's residence or usual place of business, at least one calendar day before the day on which the meeting is to be held or shall be sent to the director at such place by telegraph or be given personally or by telephone or telecopy not later than one calendar day before the meeting is to be held, but notice need not be given to any director who shall, either before or after the meeting, submit a signed waiver of notice or who shall attend the meeting without protesting, prior to or at its commencement, the lack of notice. Every notice shall state the time and place but need not state the purpose of the meeting.

    Section 9  Order of Business.  The Chairman of the Board shall preside at meetings of the Board of Directors and shall call such meetings to order and may adjourn such meetings from time to time. In the absence of the Chairman of the Board, the President and Chief Executive Officer shall preside at meetings of the Board of Directors.

    Section 10  Participation in Meeting by Means of Communications Equipment.  Any one or more members of the Board of Directors or any committee thereof may participate in any meeting of the Board of Directors or of any such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.

    Section 11  Action Without Meeting.  Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all of the members of the Board of Directors or of the committee consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board of Directors or of the committee.

    Section 12  Resignations.  Any director of the Corporation may at any time resign by giving written notice to the Board of Directors, the Chairman of the Board, the President or the Secretary of the Corporation. Such resignation shall take effect at the time specified therein, or, if the time is not

6

specified, upon receipt thereof; and, unless otherwise specified therein, the acceptance of the resignation shall not be necessary to make it effective.

    Section 13  Removal of Directors.  Any director may be removed at any time only for cause by an affirmative vote of the holders of sixty-six and two-thirds percent (66²/3%) of the then outstanding shares of voting stock. A vacancy in the Board of Directors caused by any removal may be filled by the Stockholders at that meeting or as provided in Section 3.14 of these Bylaws.

    Section 14  Vacancies.  In the case of any vacancy on the Board of Directors or in the case of any newly created directorship, a director elected to fill the vacancy or the newly created directorship for the unexpired portion of the term being filled shall be filled by the Committee on Directors. The director elected to fill a vacancy shall hold office for the unexpired term in respect of which the vacancy occurred and until his successor shall be elected and shall qualify or until his earlier death, resignation or removal in the manner provided by these Bylaws.

    Section 15  Compensation.  Each director who shall not at the time also be a salaried officer or employee of the Corporation or any of its subsidiaries (hereinafter referred to as an "outside director"), in consideration of such person serving as a director, shall be entitled to receive from the Corporation such amount per annum and such fees for attendance at meetings of the Board of Directors or of committees of the Board of Directors, or both, as the Board of Directors shall from time to time determine. In addition, each director, whether or not an outside director, shall be entitled to receive from the Corporation reimbursement for the reasonable expenses incurred by such person in connection with the performance of such person's duties as a director. Nothing contained in this Section 3.15 shall preclude any director from serving the Corporation or any of its subsidiaries in any other capacity and receiving proper consideration therefor.

ARTICLE IV

COMMITTEES

    Section 1  Committees.  The standing committees of the Board of Directors of the Corporation shall be a Compensation and Stock Option Committee, an Audit Committee, a Finance Committee and a Committee on Directors. Members of each committee of the Board of Directors, including committees established under Section 4.6 hereof, shall be designated by a majority of the Board of Directors. The Chairman of the Board shall appoint the chairman of each committee.

    Section 2  Compensation and Stock Option Committee.  The Compensation and Stock Option Committee shall have the exclusive power:

    (a) To recommend to the Board of Directors the compensation, including direct regular compensation, stock options or other appropriate incentive plans, and perquisites, if any, of the two most highly compensated Corporate Officers of the Corporation, which recommendation shall be subject to ratification, modification or rejection by the Board of Directors;

    (b) To approve the compensation, including direct regular compensation, stock options or other appropriate incentive plans, and perquisites, if any, of up to thirty-five senior officers of the Corporation and its subsidiaries including the two Corporate Officers covered in Subsection (a) above, which senior officers shall be designated by the Committee in consultation with management;

    (c) To review and approve, on a general and policy level basis only, the compensation and benefits of officers, managers and employees other than those covered in (a) and (b) above, based on management's presentation of all relevant factors of proposed actions in totality, and advise the Board of Directors of actions taken; and such compensation and benefit matters shall be deemed within the Committee's general oversight;

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    (d) To recommend to the Board of Directors corporate-wide policies with respect to direct regular compensation, stock options or other appropriate incentive plans, and perquisites, if any;

    (e) To administer the Corporation's stock option or other stock-based and equity-based plans (the "Plans"), including the review and approval of all grants thereunder;

    (f)  To fulfill the purposes of the Plans, including, without limitation, through the conditional grant of options and other benefits under the Plans;

    (g) To recommend to the Board of Directors any revisions or additions to the Plans;

    (h) To recommend to the Board of Directors appropriate actions with respect to modification, revision or termination of trusteed employee benefit or welfare plans (such as 401(k) or pension plans), with action with respect to such trusteed plans being reserved to the Board of Directors; and

    (i)  To review and report to the Board of Directors, when so requested, on any compensation matter.

    Section 3  Audit Committee.  The Audit Committee shall have the following responsibilities:

    (a) To review the scope, cost, and results of the independent audit of the Corporation's books and records, including the annual financial statements, through conferences and direct communication with the independent auditors;

    (b) To review the results of the independent audit of the annual financial statements with management and the internal auditors;

    (c) To review the adequacy of the Corporation's accounting, financial, and operating controls, and the recommendations of the independent auditors related thereto, through conferences and direct communication with the internal auditors and other responsible corporate executives;

    (d) To recommend annually to the Board of Directors the selection of the independent auditors;

    (e) To approve the appointment or removal of the independent audit manager;

    (f)  To consider proposals made by the Corporation's independent auditors for consulting work other than normal auditing and to judge whether or not such work could result in a loss of "independence"; and

    (g) To review and report to the Board of Directors, when so requested, on any accounting or financial matters.

    Section 4  Committee on Directors.  The Committee on Directors shall have the following responsibilities:

    (a) To review qualifications of candidates for Board of Directors membership from whatever source received;

    (b) (i) To nominate candidates for election to the Board of Directors at each annual meeting of Stockholders of the Corporation and (ii) to fill vacancies on the Board of Directors which occur between annual meetings of Stockholders;

    (c) To recommend to the Board of Directors criteria relating to tenure as a director, such as retirement age, limitations on the number of times a director may stand for reelection, the continuation of directors in an honorary or similar capacity and the definition of independence as it relates to the directors; and

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    (d) To recommend to the Board of Directors the actual assignments of individual directors (by name) to Board of Directors committees; and

    (e) To be responsible for implementing a process for the Board of Directors to perform a self-evaluation of its performance on at least an annual basis.

    Section 5  Finance Committee.  The Finance Committee shall have the following responsibilities:

    (a) To review the Corporation's investment policies and guidelines;

    (b) To monitor performance of the Corporation's investment portfolio;

    (c) To review the Corporation's financial structure and operations in light of the Corporation's long-term objectives and to coordinate such review with the Audit Committee;

    (d) To review and recommend to the Board of Directors appropriate action on proposed acquisitions and divestitures;

    (e) To establish appropriate authority levels for various officials of the Corporation with respect to mergers and acquisitions, divestitures and capital expenditures; and

    (f)  To review and recommend appropriate action with respect to the Corporation's short- and long-term debt structure.

    Section 6  Other Committees.  The Board of Directors may, by resolution adopted by a majority of the entire Board of Directors, designate from among its members one or more other committees, each of which shall have such authority of the Board of Directors as may be specified in the resolution of the Board of Directors designating such committee.

    Section 7  Procedures.  Any committee of the Board of Directors may adopt such rules and regulations not inconsistent with the provisions of law, the Certificate of Incorporation or these Bylaws for the conduct of its meetings as the committee may deem to be proper. A majority of the members of a committee of the Board of Directors shall constitute a quorum for the transaction of business at any meeting, and the vote of a majority of the members thereof present at a meeting at which a quorum is present shall be the act of the committee. No meeting of any committee of the Board of Directors may be held unless notice has been given and/or waived by the members of the committee. Meetings may be held at such times and places as shall be fixed by resolution adopted by a majority of the members thereof. Special meetings of any committee of the Board of Directors shall be called at the request of any member thereof. Notice of each committee meeting of the Board of Directors shall be sent by mail telegraph or telephone or delivered personally to each member thereof not later than one calendar day before the day on which the meetings is to be held, but notice need not be given to any member who shall, either before or after the meeting, submit a signed waiver of notice or who shall attend the meeting without protesting prior to or at its commencement the lack of notice. Any special meeting of any committee of the Board of Directors shall be a legal meeting without any notice thereof having been given if all of the members thereof shall be present thereat and shall not protest the holding of the meeting. Any committee of the Board of Directors shall keep written minutes of its proceedings and shall report on its proceedings to the Board of Directors.

ARTICLE V

OFFICERS

    Section 1  Election.  The officers of the Corporation shall include a Chairman of the Board (who must be a director), a President and Chief Executive Officer, a Chief Financial Officer, a Secretary and a Treasurer, each of whom shall be elected by the Board of Directors or, except for the office of Chairman of the Board and President and Chief Executive Officer, by the President and Chief Executive Officer. The Board of Directors or the President and Chief Executive Officer, in its or his

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discretion, may also choose one or more Executive Vice Presidents, Senior Vice Presidents, Vice Presidents, Assistant Secretaries, Assistant Treasurers and other officers. Each officer of the Corporation shall hold office for such term and shall exercise such powers and perform such duties as set forth in these Bylaws and as shall be determined from time to time by the Board of Directors, if such officer was appointed by the Board of Directors, or by the President and Chief Executive Officer, if such officer was appointed by the President and Chief Executive Officer. Any number of offices may be held by the same person, unless otherwise prohibited by law, the Certificate of Incorporation or these Bylaws. The officers of the Corporation need not be stockholders of the Corporation nor, except in the case of the Chairman of the Board of Directors, need such officers be directors of the Corporation. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors or by the President and Chief Executive Officer in accordance with this Section 5.1.

    Section 2  Removal.  All officers of the Corporation shall hold office until their successors are chosen and qualified, or until their earlier resignation or removal. Any officer may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any officer other than the President and Chief Executive Officer and the Chairman of the Board may also be removed at any time by the President and Chief Executive Officer.

    Section 3  Resignation.  Any officer may resign at any time by giving notice to the Board of Directors, the President and Chief Executive Officer or the Secretary of the Corporation. Any resignation shall take effect at the date of receipt of the notice of resignation or at any later date specified therein, but the acceptance of the resignation shall not be necessary to make it effective.

    Section 4  Vacancies.  A vacancy in any office because of death, resignation, removal or any other cause may be filled for the unexpired portion of the term in the manner prescribed in these Bylaws for election to the office.

    Section 5  Chairman of the Board.  The duties of the Chairman of the Board shall be to preside at meetings of the Board of Directors and, if present, to preside at the meetings of the Stockholders. The Chairman of the Board shall preside as chairman of the meetings of the Board of Directors or of any committee on which he serves, and shall preside as chairman of the Stockholder meetings. The Chairman shall work in cooperation with the President and Chief Executive Officer to prepare agendas and presentations for all meetings of the Board of Directors and of Stockholders. Except where by law the signature of the President is required the Chairman of the Board shall possess the same power as the President to sign all contracts, certificates and other instruments of the Corporation that may be authorized by the Board of Directors. The Chairman of the Board shall perform such other duties and may exercise such other powers as from time to time may be assigned to him by the Bylaws or by the Board of Directors.

    Section 6  President and Chief Executive Officer.  The President and Chief Executive Officer of the Corporation shall, subject to the control of the Board of Directors, have general supervision of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. In the absence of the Chairman of the Board, the President and Chief Executive Officer shall preside at all meetings of the Stockholders and the Board of Directors and otherwise exercise and discharge all the duties of the Chairman. The President and Chief Executive Officer shall perform such other duties as the Board of Directors may from time to time determine, subject to the terms of applicable employment agreements.

    Section 7  Chief Financial Officer.  The Chief Financial Officer shall perform all duties incident to the office of Chief Financial Officer and such other duties as from time to time may be assigned to him by the President and Chief Executive Officer or the Board of Directors.

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    Section 8  Treasurer.  The Treasurer shall perform all duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the President and Chief Executive Officer or the Board of Directors.

    Section 9  Executive Vice Presidents, Senior Vice Presidents and Vice Presidents.  Each Executive Vice President, Senior Vice President and Vice President shall have such powers and duties as shall be prescribed by the President and Chief Executive Officer or the Board of Directors.

    Section 10  Secretary.  The Secretary shall see that all notices required to be given by the Corporation are duly given and served. The Secretary shall be custodian of the seal of the Corporation and shall affix the seal or cause it to be affixed to all certificates of stock of the Corporation (unless the seal of the Corporation on the certificates shall be a facsimile, as hereinafter provided) and to all documents, the execution of which on behalf of the Corporation under its seal is duly authorized in accordance with the provisions of these Bylaws. The Secretary shall have charge of the stock ledger and also of the other books, records and papers of the Corporation and shall see that the reports, statements and other documents required by law are properly kept and filed, and the Secretary shall in general perform all of the duties incident to the office of Secretary and such other duties as from time to time may be assigned by the President and Chief Executive Officer or the Board of Directors.

    Section 11  Assistant Treasurers and Assistant Secretaries.  The Assistant Treasurers and Assistant Secretaries, if any, shall perform such duties as shall be assigned to them by the President and Chief Executive Officer or the Board of Directors, and in the absence of the Secretary or Treasurer, as the case may be, or in the event of his disability or refusal to act, shall perform the duties of the Secretary or Treasurer, respectively, and when so acting shall have all the powers of and be subject to all the restrictions upon the Secretary or Treasurer, respectively.

ARTICLE VI

INDEMNIFICATION

    Section 1  Directors and Officers.  The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or an officer of the Corporation, against expenses (including, but not limited to, attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding to the fullest extent and in the manner set forth in and permitted by the General Corporation Law of the State of Delaware and any other applicable law as from time to time may be in effect. To the maximum extent permitted by law, the Corporation shall advance expenses (including attorneys' fees) incurred by any person indemnified hereunder in defending any civil, criminal, administrative or investigative action, suit or proceeding upon any undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Corporation. Such right of indemnification and advancement of expenses shall not be deemed to be exclusive of any other rights to which such director or officer may be entitled apart from the foregoing provisions. The foregoing provisions of this Section 6.1 shall be deemed to be a contract between the Corporation and each director or officer who serves in such capacity at any time while this Section 6.1 and the relevant provisions of the General Corporation Law of the State of Delaware and other applicable law, if any, are in effect, and any repeal or modification thereof shall not affect any right or obligation then existing, with respect to any state of facts then or theretofore existing, or any action, suit or proceeding theretofore or thereafter brought or threatened based in whole or in part upon any such state of facts.

    Section 2  Agents and Employees.  The Corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that he is or

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was an employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including, but not limited to, attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding to the extent and in the manner set forth in and permitted by the General Corporation Law of the State of Delaware and any other applicable law as from time to time may be in effect. Such right of indemnification shall not be deemed to be exclusive of any other right to which such person may be entitled apart from the foregoing provisions.

ARTICLE VII

CAPITAL STOCK

    Section 1  Certificates of Shares.  Certificates representing shares of stock of each class of the Corporation, whenever authorized by the Board of Directors, shall be in such form as shall be approved by the Board of Directors. The certificates representing shares of stock of each class shall be signed by, or in the name of the Corporation by, the Chairman of the Board or the President and Chief Executive Officer or a Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer of the Corporation, and sealed with the seal of the Corporation, which may be a facsimile thereof. Any or all signatures may be facsimiles if countersigned by a transfer agent or registrar. If any officer, transfer agent or registrar whose manual or facsimile signature is affixed to any certificate ceases to be an officer, transfer agent or registrar before the certificate has been issued, it may nevertheless be issued by the Corporation with the same effect as if the officer, transfer agent or registrar were still such at the date of its issue.

    Section 2  Transfer of Shares.  Transfers of shares of stock of each class of the Corporation shall be made only on the books of the Corporation by the holder thereof or by such holder's attorney thereunto authorized by a power of attorney duly executed and filed with the Secretary of the Corporation or a transfer agent for such stock, if any, and on surrender of the certificate or certificates for such shares properly endorsed or accompanied by a duly executed stock transfer power and the payment of all taxes thereon. The person in whose name such shares of stock stand on the books of the Corporation shall be deemed to be the owner thereof for all purposes as regards the Corporation; provided that whenever any transfer of shares of stock shall be made for collateral security and not absolutely, and written notice thereof shall be given to the Secretary or to such transfer agent, such fact shall be stated in the stock ledger entry for the transfer. No transfer of shares of stock shall be valid as against the Corporation, its stockholders and creditors for any purpose, except to render the transferee liable for the debts of the Corporation to the extent provided by law, until it shall have been entered in the stock records of the Corporation by an entry showing from and to whom transferred.

    Section 3  Addresses of Stockholders.  Each Stockholder shall designate to the Secretary or transfer agent of the Corporation an address at which notice of meetings and all other corporate notices may be served or mailed to such person, and, if any Stockholder shall fail to designate such address, corporate notices may be served upon such person by mail directed to the person at the person's post office address, if any, as the same appears on the stock record books of the Corporation or at such person's last known post office address.

    Section 4  Lost, Destroyed and Mutilated Certificates.  The holder of any share of stock of the Corporation shall immediately notify the Corporation of any loss, theft, destruction or mutilation of the certificate therefor. The Corporation may issue to such holder a new certificate or certificates for such shares of stock, upon the surrender of the mutilated certificates or, in the case of loss, theft or destruction of the certificate, upon satisfactory proof of such loss, theft or destruction. The Board of Directors, or a committee designated thereby, or the transfer agents and registrars for the stock, may, in their discretion, require the owner of the lost, stolen or destroyed certificate, or such person's legal

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representative, to give the Corporation a bond in such sum and with such surety or sureties as they may direct to indemnify the Corporation and such transfer agents and registrars against any claim that may be made on account of the alleged loss, theft or destruction of any certificate or the issuance of a new certificate.

    Section 5  Regulations.  The Board of Directors may make such additional rules and regulations as it may deem to be expedient concerning the issue and transfer of certificates representing shares of stock of each class of the Corporation and may make such rules and take such action as it may deem to be expedient concerning the issue of certificates in lieu of certificates claimed to have been lost, destroyed, stolen or mutilated.

    Section 6  Fixing Date for Determination of Stockholders of Record.  In order that the Corporation may determine the Stockholders entitled to notice of or to vote at any meeting of the Stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment or any right, or entitled to exercise any right in respect of any change, conversion or exchange of stock or for the purpose of any lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 calendar days nor less than 10 calendar days before the date of such meeting, nor more than 60 calendar days prior to any other action. A determination of the Stockholders entitled to notice or to vote at a meeting of the Stockholders shall apply to any adjournment of the meeting; provided that the Board of Directors may fix a new record date for the adjourned meeting.

ARTICLE VIII

SEAL

    The Board of Directors shall provide a corporate seal, which shall bear the full name of the Corporation and such other words and figures as the Board of Directors may approve and adopt. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced.

ARTICLE IX

FISCAL YEAR

    The fiscal year of the Corporation shall end on the 31st day of December in each year.

ARTICLE X

WAIVER OF NOTICE

    Whenever any notice whatsoever is required to be given by these Bylaws, by the Certificate of Incorporation or by law, the person entitled thereto may, either before or after the meeting or other matter in respect of which such notice is to be given, waive such notice in writing, which writing shall be filed with or entered upon the records of the meeting or the records kept with respect to such other matter, as the case may be, and in such event such notice need not be given to such person and such waiver shall be deemed to be equivalent to such notice.

ARTICLE XI

AMENDMENTS

    The Board of Directors shall have the power to amend, alter or repeal these Bylaws and to adopt new Bylaws from time to time by an affirmative vote of seventy-five percent (75%) of the entire Board of Directors, as then constituted.

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ARTICLE XII

MISCELLANEOUS

    Section 1  Execution of Documents.  The Board of Directors or any committee thereof shall designate the officers, employees and agents of the Corporation who shall have the power to execute and deliver deeds, contracts, mortgages, bonds, debentures, notes, checks and other orders for the payment of money and other documents for and in the name of the Corporation and may authorize such officers, employees and agents to delegate such power (including, but not limited to, the authority to redelegate) by written instrument to other officers, employees or agents of the Corporation. Such delegation may be by resolution or otherwise and the authority granted shall be general or confined to specific matters, all as the Board of Directors or any such committee may determine. In the absence of such designation referred to in the first sentence of this Section 12.1, the officers of the Corporation shall have such power so referred to, to the extent incident to the normal performance of their duties.

    Section 2  Deposits.  All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation or otherwise as the Board of Directors or any committee thereof or any officer of the Corporation to whom power in that respect shall have been delegated by the Board of Directors or any such committee shall select.

    Section 3  Checks.  All checks, drafts, and other orders for the payment of money out of the funds of the Corporation, and all notes or other evidences of indebtedness of the Corporation, shall be signed on behalf of the Corporation in such manner as shall from time to time be determined by resolution of the Board of Directors or of any committee thereof.

    Section 4  Proxies in Respect of Stock or Other Securities of Other Corporations.  The Board of Directors or any committee thereof shall designate the officers of the Corporation who shall have the authority from time to time to appoint an agent or agents of the Corporation to exercise in the name and on behalf of the Corporation the powers and rights which the Corporation may have as the holder of stock or other securities in any other corporation and to vote or consent in respect of such stock or securities. Such designated officers may instruct the person or persons so appointed as to the manner of exercising such powers and rights, and such designated officers may execute or cause to be executed in the name and on behalf of the Corporation and under its corporate seal, or otherwise, such written proxies, powers of attorney or other instruments as they may deem to be necessary or proper so that the Corporation may exercise its powers and rights. In the absence of any such designation, the President shall have the authority granted under this Section 12.4.

    Section 5  Bylaws Subject to Law and Certificate of Incorporation.  Each provision of these Bylaws is subject to any contrary provision contained in the Certificate of Incorporation or of any applicable law as from time to time may be in effect, and, to the extent any such provision is inconsistent therewith, such provision shall be superseded thereby for as long as and in any case in which it is inconsistent, but for all other purposes these Bylaws shall continue in full force and effect.

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SIXTH AMENDED AND RESTATED BYLAWS OF HEALTH NET, INC.
ARTICLE I OFFICES
ARTICLE II MEETINGS OF STOCKHOLDERS
ARTICLE III BOARD OF DIRECTORS
ARTICLE IV COMMITTEES
ARTICLE V OFFICERS
ARTICLE VI INDEMNIFICATION
ARTICLE VII CAPITAL STOCK
ARTICLE VIII SEAL
ARTICLE IX FISCAL YEAR
ARTICLE X WAIVER OF NOTICE
ARTICLE XI AMENDMENTS
ARTICLE XII MISCELLANEOUS

EX-10.11

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EXHIBIT 10.11

AGREEMENT

    This Agreement (this "Agreement") is entered into as of        , 2001 between Health Net, Inc., a Delaware corporation (the "Company"), on the one hand, and         ("Employee"), on the other hand.

    WHEREAS, the Company and Employee are parties to a Severance Payment Agreement dated ____________, _____ (the "Severance Agreement"); and

    WHEREAS, the Company has adopted certain amendments to the acceleration/change in control provisions ("Acceleration Provisions") of its 1991 Stock Option Plan (the "1991 Plan"), 1997 Stock Option Plan (the "1997 Plan") and 1998 Stock Option Plan (the "1998 Plan" and collectively with the 1991 Plan and 1997 Plan, the "Plans"); and

    WHEREAS, the Company desires that the Employee consent to the governance and application of the amended Acceleration Provisions of the Plans to the outstanding options of the Employee under the Plans; and

    WHEREAS, Employee is willing to consent to the governance and application of the amended Acceleration Provisions of the Plans to his/her outstanding options under the Plans in exchange for an amendment of the Severance Agreement to provide for a full tax gross-up of any severance payments for any excise taxes under Section 280G of the Internal Revenue Code (the "Code") applicable to the severance payments, as set forth in this Agreement.

    NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the parties hereto agree as follows:

    1.  Plans. Employee hereby consents, in accordance with Section 14 of the 1991 Plan, Section 6.2 of the 1997 Plan and Section 6.2 of the 1998 Plan, that the Plans, as amended by the amendments to the Acceleration Provisions of the Plans set forth in Appendix A attached hereto, shall govern and apply to all outstanding options of the Employee under the Plans, regardless of the date such options were granted. To the extent the option agreements for the outstanding options of Employee under the Plans state anything to the contrary, the parties agree that such option agreement(s) are hereby amended to be consistent with the foregoing sentence.

    2.  Severance Agreement. The parties agree that the Severance Agreement is hereby amended to delete Section 7 of the Severance Agreement in its entirety and to replace it with the following new Section 7:

    7.  Tax Consequences.

    7.1 Notwithstanding any other provisions of this Agreement, in the event that (i) any payment or distribution by the Company to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change of Control or any person affiliated with the Company or such person) (all such payments and distributions, including the severance payments and benefits provided for in Section 3 hereof (the "Severance Payments"), being hereinafter called "Total Payments") would be subject (in whole or part) to the excise tax imposed under section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax") and (ii) there are any excess parachute payments (within the meaning of section 280G(b) of the Code), in the aggregate, in respect of such Total Payments in excess of $50,000, then the Company shall pay to Employee an additional cash payment (the "Tax Gross-Up") so that after receipt of such Tax Gross-Up, the payment of any additional federal, state and local income taxes on such Tax Gross-Up amount and the payment of

any Excise Taxes, the Employee shall receive such net amount of Total Payments equal to the amount that he/she would have received if no Excise Tax was due; provided, however that the Employee shall cooperate in good faith with the Company to minimize the amount of the Excise Tax that may become payable by taking any such action or making any such election as may be reasonably requested by the Company in respect of the Total Payments due to the Employee.

    7.2 Subject to the provisions of Section 7.3, all determinations required to be made under this Section 7, including whether and when a Tax Gross-Up is required and the amount of such Tax Gross-Up and the assumptions to be utilized in arriving at such determination, shall be made by the public accounting firm that, immediately prior to the Change of Control, was the Company's independent auditor (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Employee within 15 business days of the receipt of notice from the Employee that the Employee has received Total Payments, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Tax Gross-Up, as determined pursuant to this Section 7, shall be paid by the Company to the Employee within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Employee, then the Accounting Firm shall furnish to the Employee a written opinion that failure to report the Excise Tax on the Employee's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Employee. As a result of any uncertainty in the application of section 4999 of the Code at the time of the determination by the Accounting Firm hereunder, it is possible that Tax Gross-Up which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 7.3 and the Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Employee.

    7.3 The Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Tax Gross-Up. Such notification shall be given as soon as practicable but no later than 10 business days after the Employee is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which the Employee gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall:

    (1) give the Company any information reasonably requested by the Company relating to such claim,

    (2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,

    (3) cooperate with the Company in good faith in order effectively to contest such claim, and

    (4) permit the Company to participate in any proceedings relating to such claim;

provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 7.3, the Company shall control all proceedings taken in connection with such contest and, at its sole

option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided further, that if the Company directs the Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Employee on an interest-free basis and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Tax Gross-Up would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

    7.4 If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 7.3, the Employee becomes entitled to receive, and receives, any refund with respect to such claim, the Employee shall (subject to the Company's complying with the requirements of Section 7.3) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 7.3, a determination is made that the Employee shall not be entitled to any refund with respect to such claim and the Company does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Tax Gross-Up required to be paid.

    7.5 At the time that payments are made under this Agreement, the Company shall provide the Employee with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from tax counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement)."

    3.  Full Force and Effect. Except as amended hereby, the terms and provisions of the Severance Agreement shall be unchanged and shall remain in full force and effect.

    4.  Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument.

    IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written.

HEALTH NET, INC.

By:

Name:
Title:

Employee:

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EXHIBIT 10.11
AGREEMENT

EX-10.15

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Exhibit 10.15

Amendment to Second Amended and Restated
1991 Stock Option Plan

    The Health Net, Inc. Second Amended and Restated 1991 Stock Option Plan (the "1991 Plan") was amended on December 18, 2000 to delete paragraph 8 of the 1991 Plan in its entirety and to replace it with the following new paragraph 8:

"8. ACCELERATION OF OPTIONS AND RESTRICTED SHARES.

    Notwithstanding any contrary waiting period or installment period in any Stock Option Agreement or any Restriction Period in any Restricted Shares Agreement or in the Restated 1991 Plan, each outstanding Option granted under the Restated 1991 Plan shall, except as otherwise provided in the applicable Stock Option Agreement, become exercisable in full for the aggregate number of shares covered thereby, and each Restricted Share, except as otherwise provided in the Restricted Shares Agreement, shall vest unconditionally, in the event (i) the Company shall consummate (a) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock are converted into cash, securities or other property, other than a Merger, or (b) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (c) the liquidation or dissolution of the Company, or (ii) any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than the Company or any employee benefit plan sponsored by the Company or any Subsidiary) (A) shall purchase any Common Stock of the Company (or securities convertible into the Company's Common Stock) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, without the prior consent of the Board, and (B) shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in paragraph (d) of such Rule 13d-3 in the case of rights to acquire the Company's securities), or (iii) during any period of two consecutive years, individuals who at the beginning of such period constitute the entire Board shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period, or (iv) there occurs such other transactions involving a significant issuance of voting stock or change in the composition of the Board that the Board determines to be an accelerating event under this paragraph 8. Any transaction referred to in the foregoing clause (i) is herein called a Consummated Transaction, any purchase pursuant to a tender offer or exchange offer or otherwise as described in the foregoing clause (ii) is herein called a Control Purchase, the cessation of individuals constituting a majority of the Board as described in the foregoing clause (iii) is herein called a Board Change and such other transactions as described in the foregoing clause (iv) is herein called an "Other Accelerating Event". The Stock Option Agreement and Restricted Shares Agreement evidencing Options or Restricted Shares granted under the Restated 1991 Plan may contain such provisions limiting the acceleration of the exercisability of Options and the acceleration of the vesting of Restricted Shares as provided in this paragraph 8 as the Committee deems appropriate to ensure that the penalty provisions of Section 4999 of the Code, or any successor thereto in effect at the time of such acceleration, will not apply to any stock, cash or other property received by the Holder from the Company."

    The 1991 Plan was hereby further amended to delete all references to "Approved Transaction" in the 1991 Plan and to replace all such references with "Consummated Transaction."

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Exhibit 10.15
Amendment to Second Amended and Restated 1991 Stock Option Plan

EX-10.17

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Exhibit 10.17

Amendment to 1997 Stock Option Plan

    The Health Net, Inc. 1997 Stock Option Plan (the "1997 Plan") was amended on December 18, 2000 to delete subsection 6.8(b) of the 1997 Plan in its entirety and to replace it with the following new subsection 6.8(b):

``(b)

Definition of Change in Control.  A "Change in Control" shall mean:

    (i)  Consummated Transaction.  Consummation of (a) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock are converted into cash, securities or other property, other than a Merger, or (b) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (c) the liquidation or dissolution of the Company;

    (ii) Control Purchase.  The purchase by any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than the Company or any employee benefit plan sponsored by an Employer) of any Common Stock of the Company (or securities convertible into the Company's Common Stock) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, without the prior consent of the Board and, after such purchase, such person shall be the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Section (d) of such Rule 13d-3 in the case of rights to acquire the Company's securities);

    (iii) Board Change.  A change in the composition of the Board during any period of two consecutive years, such that individuals who at the beginning of such period constitute the entire Board shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period; or

    (iv) Other Transactions.  The occurrence of such other transactions involving a significant issuance of voting stock or change in the composition of the Board that the Board determines to be a Change in Control for purposes of the Plan.

    The Agreement evidencing options or Restricted Stock granted under the Plan may contain provisions limiting the acceleration of the exercisability of options and the acceleration of the vesting of Restricted Stock as provided in this Section as the Committee deems appropriate to ensure that the penalty provisions of Section 4999 of the Code, or any successor thereto in effect at the time of such acceleration, will not apply to any stock, cash or other property received by the holder from the Company."

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Exhibit 10.17
Amendment to 1997 Stock Option Plan

EX-10.19

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Exhibit 10.19

Amendments to Amended and Restated 1998 Stock Option Plan

    The Health Net, Inc. Amended and Restated 1998 Stock Option Plan (the "1998 Plan"), was amended on December 18, 2000 to delete subsection 6.8(b) of the 1998 Plan in its entirety and to replace it with the following new subsection 6.8(b):

"(b)

Definition of Change in Control.  A "Change in Control" shall mean:

    (i)  Consummated Transaction.  Consummation of (a) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock are converted into cash, securities or other property, other than a Merger, or (b) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (c) the liquidation or dissolution of the Company;

    (ii) Control Purchase.  The purchase by any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than the Company or any employee benefit plan sponsored by an Employer) of any Common Stock of the Company (or securities convertible into the Company's Common Stock) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, without the prior consent of the Board and, after such purchase, such person shall be the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Section (d) of such Rule 13d-3 in the case of rights to acquire the Company's securities);

    (iii) Board Change.  A change in the composition of the Board during any period of two consecutive years, such that individuals who at the beginning of such period constitute the entire Board shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period; or

    (iv) Other Transactions.  The occurrence of such other transactions involving a significant issuance of voting stock or change in the composition of the Board that the Board determines to be a Change in Control for purposes of the Plan.

    The Agreement evidencing Options or Restricted Stock granted under the Plan may contain such provisions limiting the acceleration of the exercisability of options and the acceleration of the vesting of Restricted Stock as provided in this Section as the Committee deems appropriate to ensure that the penalty provisions of Section 4999 of the Code, or any successor thereto in effect at the time of such acceleration, will not apply to any stock, cash or other property received by the holder from the Company."

    The 1998 Plan was also amended on October 13, 2000 to increase the number of shares of Common Stock available under the 1998 Plan from 5,000,000 shares up to 8,256,243 shares.

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Amendments to Amended and Restated 1998 Stock Option Plan

EX-10.24

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Exhibit 10.24

HEALTH NET, INC.

401(k) SAVINGS PLAN

HEALTH NET, INC.
401(k) SAVINGS PLAN

TABLE OF CONTENTS

			PAGE
ARTICLE 1	TITLE AND PURPOSE		1
ARTICLE 2	DEFINITIONS		1
ARTICLE 3	PARTICIPATION		5
	Section 3.1.	Eligibility for Participation	5
	Section 3.2.	Application for Salary Deferral Contributions	5
	Section 3.3.	Transfer to Affiliates	5
ARTICLE 4	EMPLOYER CONTRIBUTIONS		6
	Section 4.1.	Profit Sharing Contributions	6
	Section 4.2.	Salary Deferral Contributions	6
	Section 4.3.	Annual Limit on Salary Deferral Contributions	7
	Section 4.4.	Matching Contributions	7
	Section 4.5.	Limitations on Contributions for Highly Compensated Employees	8
	Section 4.6.	Limitation on Employer Contributions	12
ARTICLE 5	ROLLOVER CONTRIBUTIONS		13
	Section 5.1.	Requirements for Rollover Contributions	13
	Section 5.2.	Delivery of Rollover Contributions	13
	Section 5.3.	Special Accounting Rules for Rollover Contributions	13
ARTICLE 6	TRUST AND INVESTMENT FUNDS		14
	Section 6.1.	Trust	14
	Section 6.2.	Investment Funds	14
ARTICLE 7	PARTICIPANT ACCOUNTS		14
	Section 7.1.	Participant Accounts and Investment Elections	14
	Section 7.2.	Investments in Company Stock Fund	15
	Section 7.3.	Valuation of Funds and Plan Accounts	16
	Section 7.4.	Allocation of Contributions and Forfeitures Among Participants' Accounts	16
	Section 7.5.	Statutory Limitations on Allocations to Accounts	17
	Section 7.6.	Correction of Error	18

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ARTICLE 8	WITHDRAWALS, LOANS AND DISTRIBUTIONS		19
	Section 8.1.	Vesting	19
	Section 8.2.	Withdrawals Prior to Termination of Employment	20
	Section 8.3.	Loans to Participants	21
	Section 8.4.	Distribution Upon Termination of Employment	22
	Section 8.5.	Time and Form of Distribution upon Termination of Employment	22
	Section 8.6.	Special Rules Relating to Election of Annuity Form of Benefit	25
	Section 8.7	Designation of Beneficiary	25
	Section 8.8.	Distributions to Minor and Disabled Distributees	26
	Section 8.9.	Missing Person	27
	Section 8.10.	Successive Employer	27
ARTICLE 9	SPECIAL PARTICIPATION RULES		28
	Section 9.1.	Change of Employment Status	28
	Section 9.2.	Reemployment of a Terminated Participant	28
	Section 9.3.	Employment by Related Entities	28
	Section 9.4.	Leased Employees	29
	Section 9.5.	Reemployment of Veterans	29
ARTICLE 10	SHAREHOLDER RIGHTS WITH RESPECT TO COMPANY STOCK		30
	Section 10.1.	Voting Shares of Company Stock	30
	Section 10.2.	Tender Offers	31
ARTICLE 11	ADMINISTRATION		32
	Section 11.1.	The Committee	32
	Section 11.2.	Claims Procedure	33
	Section 11.3.	Notices to Participants	34
	Section 11.4.	Notices	34
	Section 11.5.	Records	34
	Section 11.6.	Reports of Trustee and Accounting to Participants	34
ARTICLE 12	PARTICIPATION BY OTHER EMPLOYERS		34
	Section 12.1.	Adoption of Plan	34
	Section 12.2.	Withdrawal from Participation	34
	Section 12.3.	Continuance by a Successor	35
	Section 12.4.	Company as Agent for Employers	35

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ARTICLE 13	MISCELLANEOUS		35
	Section 13.1.	Expenses	35
	Section 13.2.	Non-Assignability	35
	Section 13.3.	Employment Non-Contractual	36
	Section 13.4.	Limitation of Rights	36
	Section 13.5.	Merger or Consolidation with Another Plan	36
	Section 13.6.	Gender and Plurals	36
	Section 13.7.	Applicable Law	36
	Section 13.8.	Severability	36
	Section 13.9.	No Guarantee	36
	Section 13.10.	Plan Voluntary	37
	Section 13.11.	Tax Withholding	37
ARTICLE 14	TOP-HEAVY PLAN REQUIREMENTS		37
	Section 14.1.	Top-Heavy Plan Determination	37
	Section 14.2.	Definitions and Special Rules	37
	Section 14.3.	Minimum Contribution for Top-Heavy Years	38
	Section 14.4.	Special Rules for Applying Statutory Limitations on Benefits	38
ARTICLE 15	AMENDMENT, ESTABLISHMENT OF SEPARATE PLAN AND TERMINATION		38
	Section 15.1.	Amendment	38
	Section 15.2.	Establishment of Separate Plan	38
	Section 15.3.	Termination	39
	Section 15.4	Trust Fund to Be Applied Exclusively for Participants and Their Beneficiaries.	39

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ARTICLE 1

TITLE AND PURPOSE

    The title of the Plan shall be the "Health Net, Inc. 401(k) Savings Plan." The Plan is an amendment and restatement of the Plan as in effect as of December 31, 2000, and is effective as of January 1, 2001, unless any provision specifies a different effective date.

    The Plan is designated as a "profit sharing plan" within the meaning of U.S. Treasury Regulation § 1.401-1(a)(2)(ii).

ARTICLE 2

DEFINITIONS

    As used herein, the following words and phrases shall have the following respective meanings when capitalized:

    (1)  Affiliate.  (a) A corporation that is a member of the same controlled group of corporations (within the meaning of section 414(b) of the Code) as an Employer, (b) a trade or business (whether or not incorporated) under common control (within the meaning of section 414(c) of the Code) with an Employer, (c) any organization (whether or not incorporated) that is a member of an affiliated service group (within the meaning of section 414(m) of the Code) that includes an Employer, a corporation described in clause (a) of this subdivision or a trade or business described in clause (b) of this subdivision, or (d) any other entity that is required to be aggregated with an Employer pursuant to regulations promulgated under section 414(o) of the Code.

    (2)  After-Tax Account.  The account established pursuant to Section 7.1 to which a Participant's after-tax contributions, if any, transferred to the Plan from the FHC Plan or the QualMed Plan (or any other plan qualified under section 401(a) of the Code) and any earnings (or losses) thereon are credited.

    (3)  Beneficiary.  A person entitled under Section 8.7 to receive benefits in the event of the death of a Participant.

    (4)  Board of Directors.  The board of directors of the Company.

    (5)  Break in Service.  Any period during which an Employee does not perform any Hour of Service for an Employer. For purposes of this definition, an Employee shall be credited with Hours of Service for any period of absence from an Employer during which such Employee (a) is in Qualified Military Service, provided that the Employee returns to the employ of an Employer within the period prescribed by USERRA, (b) is on an uncompensated leave of absence duly granted by an Employer, or (c) is absent from work for a maximum of 24 consecutive months because of (i) the pregnancy of the Employee, (ii) the birth of the Employee's child, (iii) the placement of a child with the Employee in connection with the Employee's adoption of such child, or (iv) the need to care for any such child for a period beginning immediately following such birth or placement. Notwithstanding the foregoing, no Hours of Service shall be credited to an Employee under clause (c) of this subdivision unless the Employee timely furnishes to the Committee a certificate of birth, proof of adoption or other appropriate legal documentation setting forth parentage or adoption.

    (6)  Code.  The Internal Revenue Code of 1986, as amended.

    (7)  Committee.  The committee designated in Section 11.1 to administer the Plan, or any person, corporation, partnership or committee to which the Committee has delegated its responsibilities pursuant to Section 11.1.

    (8)  Company.  Health Net, Inc., a Delaware corporation, and any successor to such corporation that adopts the Plan pursuant to Article 12.

    (9)  Company Stock.  Class A Common Stock of Health Net, Inc.

    (10)  Company Stock Fund.  The investment fund established and maintained by the Trustee in accordance with Section 6.2.

    (11)  Compensation.  The total cash earnings paid by an Employer to an Eligible Employee and properly reportable on Form W-2 for a Plan Year (including bonuses and overtime), and all amounts not includible in such Eligible Employee's gross income for federal income tax purposes solely on account of his or her election to have compensation reduced pursuant to the Plan or any other qualified cash or deferred arrangement described in section 401(k) of the Code or a cafeteria plan as defined in section 125 of the Code, but excluding (i) any reimbursements or other allowances for automobile, relocation, travel, education expenses or other expenses (even if includible in the Employee's gross income for federal income tax purposes), (ii) severance payments, (iii) retention payments, (iv) disability payments, and (v) extraordinary items of remuneration. An Employee's Compensation in excess of (I) $160,000 for the Plan Year beginning January 1, 1997, and (II) for each subsequent Plan Year, the dollar amount prescribed by section 401(a)(17) of the Code (as adjusted for increases in the cost-of-living) shall not be taken into account for any purposes under the Plan.

    (12)  Compensation and Stock Option Committee.  The Compensation and Stock Option Committee of the Board of Directors of the Company.

    (13)  Disability.  A total physical or mental inability to perform work, resulting from injury or disease, which is expected to be permanent, as determined by the Committee. The existence of a "Disability" shall be determined by the Committee according to uniform principles consistently applied, and based upon such evidence as the Committee believes necessary or desirable.

    (14)  Effective Date.  Except as provided elsewhere, the effective date of this amendment and restatement of the Plan with respect to the Company and each other entity that is an Employer on December 31, 2000 shall be January 1, 2001, and in the case of any other Employer shall be the date designated by such Employer.

    (15)  Eligible Employee.  With respect to each Employer, unless specified otherwise by the board of directors of each Employer, any Employee thereof, excluding:

(i)

an Employee who (A) is scheduled to perform fewer than 20 Hours of Service per week and (B) performs fewer than 1,000 Hours of Service during the Plan Year,



(ii)

an Employee whose employment is governed by the terms of a collective bargaining agreement under which retirement benefits were the subject of good faith bargaining, but which does not provide for participation in the Plan, and



(iii)

an Employee who is a nonresident alien (within the meaning of section 7701(b)(1)(B) of the Code).

    (16)  Employee.  An individual whose relationship with an Employer is, under common law, that of an employee. Notwithstanding the foregoing, no individual who renders services for an Employer shall be considered an Employee for purposes of the Plan if such individual renders such services pursuant to (i) an agreement providing that such services are to be rendered by the individual as an independent contractor, (ii) an agreement with an entity, including a leasing organization within the meaning of section 414(n)(2) of the Code, that is not an Employer or Affiliate or (iii) an agreement that contains a waiver of participation in the Plan.

    (17)  Employer.  The Company, each Affiliate listed in Exhibit A hereto (as such exhibit is revised from time to time), and each other entity that, with the consent of the Company, elects to participate in the Plan in the manner described in Section 12.1 and any successor entity that adopts the Plan pursuant to Section 12.3. If any such entity withdraws from participation in the Plan pursuant to Section 12.2, or terminates its participation in the Plan pursuant to Section 15.3, then such entity shall

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thereupon cease to be an Employer. An entity shall cease being an Employer as of the date it ceases to be an Affiliate, unless the Company consents to such entity's continued participation in the Plan.

    (18)  Entry Date.  The first day of each payroll period.

    (19)  ERISA.  The Employee Retirement Income Security Act of 1974, as amended from time to time.

    (20)  FHC Plan.  The former Foundation Health Corporation Profit Sharing and 401(k) Plan.

    (21)  401(k) Administrator.  The person or persons appointed by the Committee to perform the duties of the 401(k) Administrator as described herein.

    (22)  Hour of Service.  Each hour for which:

    (a) an Employee is paid, or entitled to payment, for the performance of duties as an Employee;

    (b) an Employee is paid, or entitled to payment, by an Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), lay-off, jury, military duty or leave of absence, provided that no more than 501 Hours of Service will be credited under this paragraph (b) for any single continuous period (regardless of whether such period occurs in a single Plan Year);

    (c) back pay is awarded or agreed to by the Employer or an Affiliate, provided that such hours shall be credited to the Plan Years to which the award, agreement or payment pertains rather than the Plan Year in which the award, agreement or payment is made.

For purposes of paragraphs (b) and (c) above, an Hour of Service shall be calculated in accordance with U.S. Department of Labor Regulation § 2530.200b-2 which provides that (i) if a payment is based upon hours, days, weeks or other unit of time the number of Hours of Service credited will be the number of regularly scheduled working hours for such Employee for such unit of time, and (ii) if the payment due is not based upon units of time, the number of Hours of Service credited shall be equal to the amount of the payment divided by the Employee's most recent hourly rate of compensation. For payments made to an Employee without a regular work schedule, the number of hours credited shall be calculated on a reasonable basis which reflects the average hours worked by the Employee, or by other employees in the same job classification, over a representative period of time and which is consistently applied with respect to all employees within the same job classification. In order to avoid double counting, the same Hours of Service shall not be credited both under paragraph (c) and either paragraph (a) or paragraph (b), as applicable.

    (23)  HSI Plan.  The former Health Systems International, Inc. 401(k) Associate Savings Plan.

    (24)  Matching Contributions.  Matching contributions and supplemental matching contributions made to the Plan by an Employer pursuant to Section 4.4.

    (25)  Matching Contributions Account.  The account established pursuant to Section 7.1 to which Matching Contributions, if any, made on behalf of a Participant and earnings (or losses) thereon are credited.

    (26)  Merger Date.  The date as of which the trust holding the assets of the FHC Plan, the provisions of which are set forth herein, merged into the trust holding the assets of the HSI Plan, as set forth herein.

    (27)  Participant.  Subject to Section 5.3, an Eligible Employee who has satisfied the requirements set forth in Article 3. An individual shall cease to be a Participant upon the complete distribution of his or her accounts under the Plan.

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    (28)  Plan.  The plan herein set forth, and as from time to time amended.

    (29)  Plan Year.  The twelve-month period beginning on January 1 of each calendar year.

    (30)  Profit Sharing Account.  The account established pursuant to Section 7.1 to which Profit Sharing Contributions, if any, allocated to a Participant and earnings (or losses) thereon are credited.

    (31)  Profit Sharing Contribution.  A profit sharing contribution made to the Plan by an Employer pursuant to Section 4.1.

    (32)  Qualified Nonelective Contribution Account.  The account established pursuant to Section 7.1 to which qualified nonelective contributions, if any, allocated to a Participant and earnings (or losses) thereon are credited.

    (33)  Qualified Matching Contribution Account.  The account established pursuant to Section 7.1 to which qualified matching contributions, if any, allocated to a Participant and earnings (or losses) thereon are credited.

    (34)  Qualified Military Service.  Any service in the uniformed services (as defined in 38 U.S.C. § 4303) by an individual if such individual is entitled to reemployment rights under USERRA with respect to such service.

    (35)  QualMed Plan.  The former QualMed, Inc. Employee Savings Plan.

    (36)  Rollover Account.  The account established pursuant to Section 7.1 to which a Participant's Rollover Contributions, if any, and any earnings (or losses) thereon are credited.

    (37)  Rollover Contributions.  Rollover contributions made by a Participant pursuant to Section 5.1.

    (38)  Salary Deferral Contributions.  Before-tax payroll reduction contributions made to the Plan by an Employer on behalf of Participants pursuant to Section 4.2.

    (39)  Salary Deferral Contributions Account.  The account established pursuant to Section 7.1 to which a Participant's Salary Deferral Contributions, if any, and any earnings (or losses) thereon are credited.

    (40)  Service.  The aggregate of the periods during which an Employee is employed by an Employer and any periods of employment required to be taken into account pursuant to Section 9.4. Notwithstanding the previous sentence, in the case of an Employee who was a Participant in the HSI Plan immediately prior to the Effective Date of the September 1, 1997 amendment and restatement of the Plan, such Employee's Service shall be the sum of (i) the Employee's Years of Service as of December 31, 1996, determined under, and as defined by, the terms of such plan as in effect immediately prior to such Effective Date, (ii) the aggregate of the periods commencing on and after January 1, 1998 during which the Employee is employed by an Employer and any periods of employment on and after such date that are required to be taken into account pursuant to Section 9.4 and (iii) the greater of (A) the Service that would be credited to the Employee during the Plan Year beginning January 1, 1997 under the provisions of such plan in effect immediately prior to such Effective Date and (B) the Service that would be credited to the Employee in such year under clause (ii) above.

    For purposes of the first sentence of this subdivision (40) and clause (ii) above, an Employee shall be deemed to be employed by an Employer during (i) any period of absence from employment by an Employer which is of less than twelve (12) months duration, (ii) the first twelve months of any period of absence from employment for any reason other than the Employee's quitting, retiring or being discharged and (iii) any period of absence from such employment during which the Employee is in

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Qualified Military Service, provided that the Employee returns to the employ of the Employer within the period prescribed by USERRA.

    An Employee's Service prior to a Break in Service of five consecutive years shall be disregarded if such Employee had no vested interest in his or her Profit Sharing Account or Matching Contributions Account upon the commencement of such Break in Service.

    (41)  Trust.  A Trust created by agreement between the Company and the Trustee, as from time to time amended.

    (42)  Trustee.  The trustee provided for in Article 6, or any successor trustee or, if there is more than one trustee acting at any time, all of such trustees collectively.

    (43)  Trust Fund.  All money and property of every kind of the Trust held by the Trustee pursuant to the terms of the agreement governing the Trust.

    (44)  USERRA.  The Uniformed Services Employment and Reemployment Rights Act of 1994.

    (45)  Valuation Date.  Each business day on which the New York Stock Exchange is open for business or such other days as the Committee may determine.

ARTICLE 3

PARTICIPATION

    Section 3.1.  Eligibility for Participation.  Each Eligible Employee who immediately before the Effective Date was a Participant shall continue to be a Participant as of the Effective Date. Each other Employee shall become a Participant as soon as administratively practicable after the later of (i) the first Entry Date coincident with or next following the date the Employee becomes an Eligible Employee and (ii) the date the Employee is hired by his or her Employer.

    Section 3.2.  Application for Salary Deferral Contributions.  A Participant who desires to make Salary Deferral Contributions shall execute and deliver to his or her Employer, in accordance with procedures prescribed by the Committee, an application on the form, or by telephonic or such electronic means as may be prescribed by the Committee, specifying his or her chosen rate of Salary Deferral Contributions. Such application shall authorize the Participant's Employer to reduce the Participant's Compensation by the amount of any such Salary Deferral Contributions. The application shall constitute the Participant's acceptance of and agreement to all provisions of the Plan. Any election made pursuant to this Section shall be effective on the Entry Date occurring as soon as administratively practicable after the Salary Deferral Contribution application is received by the recordkeeper.

    Section 3.3.  Transfer to Affiliates.  If a Participant is transferred from one Employer to another Employer or from an Employer to an Affiliate that is not an Employer, then such transfer shall not terminate the Participant's participation in the Plan, and the Participant shall continue to participate in the Plan until an event occurs that would have entitled the Participant to a complete distribution of the Participant's vested interest in his or her accounts under the Plan had the Participant continued to be employed by an Employer until the occurrence of such event. Nevertheless, a Participant shall not be entitled to make Salary Deferral Contributions to the Plan, to borrow from the Plan pursuant to Section 8.3 (except to the extent required by law), or to receive allocations of Matching Contributions or Profit Sharing Contributions during any period of employment by any Affiliate that is not an Employer, and periods of employment with an Affiliate that is not an Employer shall be taken into account only to the extent set forth in Section 9.4.

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ARTICLE 4

EMPLOYER CONTRIBUTIONS

    Section 4.1.  Profit Sharing Contributions.

    (a)  Employer Profit Sharing Contributions.  Subject to the limitations of Sections 4.6 and 7.5, for each Plan Year, each Employer shall contribute on behalf of each Participant a Profit Sharing Contribution in such amount as the Employer may, in its sole discretion, determine.

    (b)  Company Profit Sharing Contributions.  Subject to the limitations set forth in Section 7.5, in addition to any Profit Sharing Contribution that an Employer may make pursuant to subsection (a) of this Section 4.1, for each Plan Year, each Employer shall contribute on behalf of each Participant a Profit Sharing Contribution in such amount as the Company may, in its sole discretion, determine.

    (c)  General.  Profit Sharing Contributions made pursuant to subsections (a) and (b) of this Section 4.1 shall be allocated in the manner as set forth in Section 7.4(a). Any Profit Sharing Contribution made pursuant to this Section 4.1 shall be made wholly in cash, wholly in shares of Company Stock, or in a combination thereof, as determined by the Company. A Profit Sharing Contribution made pursuant to this Section 4.1 for any Plan Year shall be delivered by the Employer making the contribution to the Trustee prior to the due date, including any extensions thereof, of the Employer's federal income tax return for the fiscal year of the Employer which ends with or within such Plan Year. If any such Profit Sharing Contribution is made by the delivery to the Trustee of shares of Company Stock, then such stock shall be valued either (i) at the closing price of the stock as reported in The Wall Street Journal on the New York Stock Exchange Composite Transactions List (or the consolidated tape of such other principal exchange on which such stock is traded) as of the date such shares are delivered to the Trustee or purchased by the Trustee or, if such date is not a trading day, such price on the most recent trading day prior thereto or (ii) by the average trading price of the stock, as determined by the Committee in its sole discretion, on such date.

    (d)  Special Company Contribution.  Effective January 1, 1999, the Company shall make to the Plan on behalf of each Participant who during the period from March 1, 1998 until December 31, 1998 directed the purchase or sale of shares of Company Stock in the Company Stock Fund for his or her account, a special Company Contribution equal to the aggregate amount of the brokerage commissions charged to such Participants for the purchase and sale of shares of Company Stock in the Company Stock Fund during such period. Each such Participant described in this subsection (d) shall receive an allocation equal to the Special Contribution multiplied by a fraction, the numerator of which is the total number of shares of Company Stock purchased and sold in respect of such Participant's account for the period beginning on March 1, 1998 and ending on December 31, 1998 and the denominator of which is the total number of shares of Company Stock purchased and sold in respect of all Plan accounts for such period.

    Section 4.2.  Salary Deferral Contributions.

    (a)  Initial Election.  Subject to the limitations set forth in Sections 4.3, 4.5, 4.6, 7.5, and 8.2(c), each Employer shall contribute on behalf of each Participant who is an Employee of such Employer an amount equal to a whole percentage not less than one percent (1%) and not more than 17 percent (17%) of such Participant's Compensation for each payroll period as designated by the Participant on his or her application pursuant to Section 3.2. Salary Deferral Contributions shall be delivered to the Trustee as soon as practicable after the end of each payroll period in which the amount of such contribution would otherwise have been paid to the Participant.

    (b)  Changes in the Rate or Suspension of Salary Deferral Contributions.  A Participant's Salary Deferral Contributions shall continue in effect at the rate designated by such Participant pursuant to subsection (a) of this Section until the Participant changes such designation or such contributions are

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suspended. A Participant may change such designation or suspend such contributions as of such time and in such manner as may be prescribed by the Committee. Any election made pursuant to this subsection shall be effective only with respect to Compensation not yet earned as of the effective date of such election.

    Section 4.3.  Annual Limit on Salary Deferral Contributions.

    (a)  General Rule.  Notwithstanding the provisions of Section 4.2, a Participant's Salary Deferral Contributions for any calendar year shall not exceed (i) $9,500 for the 1997 calendar year and (ii), for each subsequent year, the dollar amount prescribed by section 402(g) of the Code (as adjusted for increases in the cost-of-living in accordance with section 402(g)(5) of the Code).

    (b)  Correction of Excess Salary Deferral Contributions.  If for any calendar year, the aggregate of the (i) Salary Deferral Contributions to the Plan and (ii) amounts contributed under other qualified cash or deferred arrangements (described in section 401(k) of the Code) which are maintained by an Employer or Affiliate exceeds the limit imposed by Section 4.3(a) for the calendar year in which such contributions were made ("Excess Salary Deferral Contributions"), then, to the extent administratively practicable, the Trustee shall distribute an amount equal to such Excess Salary Deferral Contributions (adjusted for gains and losses as determined pursuant to applicable regulations) to such Participant no later than the April 15th following such calendar year.

    (c)  Correction of Other Excess Contributions.  If for any calendar year a Participant determines that the aggregate of the (i) Salary Deferral Contributions to the Plan and (ii) amounts contributed under all other plans or arrangements described in section 401(k), 408(k) or 403(b) of the Code, including those maintained by other employers, will exceed the limit imposed by Section 4.3(a) for the calendar year in which such contributions were made, such Participant shall be permitted, pursuant to such rules and at such time prior to the April 15 following such calendar year as determined by the Committee, to submit a written request for the distribution of an amount equal to or less than the amount of such excess contributions. The request described in this Section 4.3(c) shall be made on a form designated by the Committee and shall specify the amount of such excess contributions and the amount to be distributed from the Plan. The request shall be accompanied by the Participant's written statement that if such amount is not distributed, the amounts contributed by the Participant under all plans and arrangements described under sections 401(k), 408(k), and 403(b) of the Code will exceed the limit for such Participant under section 402(g) of the Code. The Committee shall direct the Trustee to distribute such amount no later than such April 15.

    Section 4.4.  Matching Contributions.

    (a)  Employer Matching Contributions.  Subject to the limitations set forth in Sections 4.5, 4.6 and 7.5, each Employer shall contribute for each payroll period on behalf of each Participant, an amount equal to 50 percent (50%) of the Salary Deferral Contributions made on behalf of the Participant for such payroll period, but only to the extent that such Salary Deferral Contributions do not exceed six percent (6%) of such Participant's Compensation for such payroll period. Matching Contributions for a Plan Year by an Employer shall be made wholly in cash, wholly in shares of Company Stock, or in a combination thereof, as determined by the Company. Matching Contributions shall be delivered to the Trustee as soon as practicable after the end of each payroll period to which such contributions relate. If any such Matching Contribution is made by the delivery to the Trustee of shares of Company Stock, then such stock shall be valued either (i) at the closing price of the stock as reported in The Wall Street Journal on the New York Stock Exchange Composite Transactions List (or the consolidated tape of such other principal exchange on which such stock is traded) as of the date such shares are delivered to the Trustee or, if such date is not a trading day, such price on the most recent trading day prior thereto, or (ii) by the average trading price of the stock, as determined by the Committee in its sole discretion, on such date.

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    (b)  Other Matching Contributions.

    (1) Supplemental Matching Contributions.  Subject to the limitations set forth in Sections 4.5, 4.6 and 7.5, each Employer also shall contribute for each Plan Year on behalf of each Participant (i) who on the last day of such Plan Year is an Eligible Employee of such Employer, (ii) who first incurs a Disability within such Plan Year or (iii) who terminated employment during such Plan Year on account of death or after attaining age 55, a supplemental Matching Contribution equal to the excess of 50 percent (50%) of the Salary Deferral Contributions made on behalf of the Participant for the Plan Year, but only to the extent that such Salary Deferral Contributions do not exceed six percent (6%) of such Participant's Compensation for such Plan Year, over the Matching Contributions made on behalf of such Participant pursuant to Section 4.4(a) for such Plan Year.

    (2) Discretionary Matching Contributions.  Subject to the limitations of Sections 4.5, 4.6 and 7.5, for each Plan Year, each Employer may contribute on behalf of each Participant (i) who on the last day of such Plan Year is an Eligible Employee of such Employer, (ii) who first incurs a Disability within such Plan Year or (iii) who terminated employment during such Plan Year on account of death or after attaining age 55, a discretionary Matching Contribution in such amount or such percentage of Compensation as the Company may, in its sole discretion, determine.

    (3) General.  Matching Contributions for a Plan Year made pursuant to Section 4.4 by an Employer shall be made wholly in cash, wholly in shares of Company Stock, or in a combination thereof, as determined by the Company. Matching Contributions for any Plan Year shall be delivered to the Trustee prior to the due date, including extensions thereof, of the Employer's federal income tax return for the fiscal year of the Employer that coincides with such Plan Year. If any Matching Contributions are made by the delivery to the Trustee of shares of Company Stock, then such stock shall be valued either (i) at the closing price of the stock as reported in The Wall Street Journal on the New York Stock Exchange Composite Transactions List (or the consolidated tape of such other principal exchange on which such stock is traded) as of the date such shares are delivered to the Trustee or, if such date is not a trading day, such price on the most recent trading day prior thereto or (ii) by the average trading price of the stock, as determined by the Committee in its sole discretion, on such date.

    Section 4.5.  Limitations on Contributions for Highly Compensated Employees.

    (a)  Actual Deferral Percentage Test—Section 401(k)(3) of the Code.  Notwithstanding the provisions of Section 4.2, if the Salary Deferral Contributions made pursuant to such Section for a Plan Year fail to satisfy both of the tests set forth in paragraphs (1) and (2) of this subsection, then the adjustments prescribed in paragraph (1) of subsection (e) of this Section shall be made.

    (1) The Average Deferral Percentage for the group consisting of highly compensated Eligible Employees does not exceed the product of the Average Deferral Percentage for the group consisting of all other Eligible Employees multiplied by 1.25.

    (2) The Average Deferral Percentage for the group consisting of highly compensated Eligible Employees (i) does not exceed the Average Deferral Percentage for the group consisting of all other Eligible Employees by more than two percentage points, and (ii) does not exceed two times the Average Deferral Percentage of such group.

    (b)  Actual Contribution Percentage Test—Section 401(m) of the Code.  Notwithstanding the provisions of Section 4.4, if the Matching Contributions made pursuant to such Section for a Plan Year fail to satisfy both of the tests set forth in paragraphs (1) and (2) of this subsection, then the adjustments prescribed in paragraph (2) of subsection (e) of this Section shall be made.

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    (1) The Average Contribution Percentage for the group consisting of highly compensated Eligible Employees does not exceed the product of the Average Contribution Percentage for the group consisting of all other Eligible Employees multiplied by 1.25.

    (2) The Average Contribution Percentage for the group consisting of highly compensated Eligible Employees (i) does not exceed the Average Contribution Percentage for the group consisting of all other Eligible Employees by more than two percentage points, and (ii) does not exceed two times the Average Contribution Percentage of such group.

    (c)  Aggregate Limit on Contributions.  Notwithstanding anything herein to the contrary, if the sum of the Average Deferral Percentage (as determined under paragraph (1) of subsection (e) of this Section after making the adjustments required by such paragraph for the Plan Year) and the Average Contribution Percentage (as determined under paragraph (2) of subsection (e) of this Section after making the adjustments required by such paragraph for the Plan Year) for the group consisting of Participants who are highly compensated Eligible Employees exceeds, or in the judgment of the Committee is likely to exceed, the Aggregate Limit for such Plan Year, then the adjustments prescribed in paragraph (3) of subsection (e) of this Section shall be made.

    (d)  Definitions and Special Rules.  For purposes of this Section, the following terms shall have the meaning set forth below:

    (1) The "Average Deferral Percentage" for a Plan Year for a group of Eligible Employees shall be the average of the ratios, calculated to the nearest one-hundredth of one percent (.01%), of the Salary Deferral Contributions for the benefit of each Eligible Employee in such group, plus any qualified nonelective contributions or qualified matching contributions designated by an Employer for this purpose pursuant to Section 4.5(f) for such Eligible Employee to the total compensation for such Plan Year paid to such Employee. The Committee may elect, in the manner prescribed by U.S. Treasury Regulations, to compute the Average Deferral Percentage for a Plan Year for the group consisting of nonhighly compensated Eligible Employees on the basis of prior Plan Year data.

    (2) The "Average Contribution Percentage" for a Plan Year for a group of Eligible Employees shall be the average of the ratios, calculated to the nearest one-hundredth of one percent (.01%), of the Matching Contributions for the benefit of each Eligible Employee, plus any qualified nonelective contributions designated by an Employer for this purpose pursuant to Section 4.5(f) for such Eligible Employee to the total compensation for such Plan Year paid to such Employee. The Committee may elect, in the manner prescribed by U.S. Treasury Regulations, to compute the Average Contribution Percentage for a Plan Year for the group consisting of nonhighly compensated Eligible Employees on the basis of prior Plan Year data.

    (3) The "Aggregate Limit" shall equal the greater of:

    (A) the sum of (i) 1.25 times the greater of the Average Deferral Percentage or the Average Contribution Percentage for the group consisting of all Eligible Employees who are nonhighly compensated Employees plus (ii) the lesser of (a) the sum of two percentage points and the lesser of the Average Deferral Percentage and the Average Contribution Percentage for the group consisting of all Eligible Employees who are nonhighly compensated Employees and (b) 200 percent (200%) of the lesser of the Average Deferral Percentage and the Average Contribution Percentage for the group consisting of all Eligible Employees who are nonhighly compensated Employees; and

    (B) the sum of (i) 1.25 times the lesser of the Average Deferral Percentage or the Average Contribution Percentage for the group consisting of all Eligible Employees who are nonhighly compensated Employees plus (ii) two percentage points plus the greater of (a) the Average Deferral Percentage for the group consisting of all Eligible Employees who are

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nonhighly compensated Employees and (b) the Average Contribution Percentage for the group consisting of all Eligible Employees who are nonhighly compensated Employees, but not greater than 200 percent (200%) of the greater of (a) and (b) above.

    (4) A "highly compensated" Employee or Eligible Employee, is an Employee or Eligible Employee, as the case may be, who is (a) a 5%-owner (as determined under section 416(i)(1)(A)(iii) of the Code) at any time during the Plan Year or the preceding Plan Year or (b) is paid compensation in excess of $80,000 (as adjusted for increases in the cost of living in accordance with section 415(d) of the Code) from an Employer for the prior Plan Year. If the Committee so elects for a Plan Year, then the Employees taken into account under clause (b) above shall be limited to those Employees who were members of the "top-paid group" (as defined in section 414(q)(3) of the Code) for the preceding Plan Year.

    (5) The term "compensation" shall have the meaning set forth in section 414(s) of the Code or, in the discretion of the Committee, any other meaning in accordance with the Code for these purposes.

    (6) If the Plan and one or more other plans of the Employer to which salary deferral contributions or qualified nonelective contributions (as such term is defined in section 401(m)(4)(C) of the Code) are made are treated as one plan for purposes of section 410(b) of the Code, then such plans shall be treated as one plan for purposes of this Section.

    (e)  Adjustments to Comply with Limits.  This subsection sets forth the adjustments and correction methods that shall be used to comply with the actual deferral percentage test under section 401(k)(3) of the Code, and the actual contribution percentage test under section 401(m) of the Code.

(1)

Adjustments to Comply with Actual Deferral Percentage Test.

    (A) Adjustment to Salary Deferral Contributions of Highly Compensated Employees.  The Committee shall cause to be made such periodic computations as it shall deem necessary or appropriate to determine whether either of the tests set forth in clause (1) or (2) of Section 4.5(a) is satisfied during a Plan Year, and, if in the Committee's judgment it appears that neither of such tests will be satisfied, then the Committee shall take such steps as it deems necessary or appropriate to adjust the Salary Deferral Contributions for all or a portion of such Plan Year on behalf of Participants who are highly compensated employees to the extent necessary in order for one of such tests to be satisfied. If, as of the end of the Plan Year, the Committee determines that, notwithstanding any adjustments made pursuant to the preceding sentence, neither of the tests set forth in Section 4.5(a) has been satisfied, the total amount by which Salary Deferral Contributions must be reduced in order to satisfy either such test shall be determined by reducing contributions made on behalf of highly compensated employees in order of the actual deferral percentages beginning with the highest of such percentages (as prescribed by section 401(k)(8)(B) of the Code) (the "excess contributions amount"). The amount to be returned to each Participant who is required to receive a portion of the excess contribution amount shall be determined by first reducing the Salary Deferral Contributions of each Participant who is a highly compensated employee and whose actual dollar amount of Salary Deferral Contributions for such Plan Year is the highest until such dollar amount equals the next highest actual dollar amount of Salary Deferral Contributions made for such Plan Year on behalf of any highly compensated employee, or until the total reduction equals the excess contributions amount. If further reductions are necessary, then the Salary Deferral Contributions on behalf of each Participant who is a highly compensated employee and whose actual dollar amount of Salary Deferral Contributions, after the reduction described in the preceding sentence, is the highest shall be reduced in accordance with the previous sentence. Such reductions shall continue to be made to the extent necessary so that the total reduction equals the excess contributions amount.

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    (B) Corrective Distributions and Forfeitures.  No later than 2¹/2 months after the end of the Plan Year (or if correction by such date is administratively impracticable, no later than the last day of the subsequent Plan Year), the Company shall cause to be distributed to each affected Participant (i) the amount of Salary Deferral Contributions to be returned to such Participant pursuant to subparagraph (A) above, plus any income and minus any loss allocable thereto, and any corresponding Matching Contributions plus any income and minus any loss allocable thereto shall be forfeited. The amount of any income or loss allocable to any such reductions to be so distributed or forfeited shall be determined by the Committee in accordance with applicable U.S. Treasury Regulations. Any amounts forfeited pursuant to this paragraph shall be treated in the same manner as forfeitures described in Section 8.3(c). The amount of Salary Deferral Contributions (and income or loss allocable thereto) to be distributed to a Participant hereunder shall be reduced by any Salary Deferral Contributions previously distributed to such Participant pursuant to Section 4.3 in order to comply with the limitations of section 402(g) of the Code. The unadjusted amount of any such reductions so distributed or forfeited shall be treated as "annual additions" for purposes of Section 7.5 relating to the limitations under section 415 of the Code.

(2)

Adjustments to Comply with the Actual Contribution Percentage Test.

    (A) Adjustment to Matching Contributions of Highly Compensated Employees.  If, as of the end of the Plan Year but after taking into account the forfeiture of Matching Contributions made on behalf of highly compensated employees pursuant to subparagraph (1)(B) above, the Committee determines that neither of the tests set forth in clause (1) or (2) of Section 4.5(b) is satisfied for such Plan Year, then the Committee shall calculate a total amount by which Matching Contributions must be reduced in order to satisfy either such test, by reducing contributions made on behalf of highly compensated employees in order of their contribution percentages beginning with the highest of such percentages (as prescribed by section 401(m)(6)(B) of the Code) (the "excess aggregate contributions amount"). The amount to be reduced with respect to each Participant who is required to receive a portion of the excess aggregate contributions amount shall be determined by first reducing the Matching Contributions for each Participant who is a highly compensated employee and whose actual dollar amount of Matching Contributions for such Plan Year is the highest until such reduced dollar amount equals the next highest dollar amount of Matching Contributions made for such Plan Year on behalf of any highly compensated employee, or until the total reduction equals the excess aggregate contributions amount. If further reductions are necessary then such Matching Contributions on behalf of each Participant who is a highly compensated employee and whose actual dollar amount of Matching Contributions made for such Plan Year is the highest (determined after the reduction described in the preceding sentence) shall be reduced in accordance with the preceding sentence. Such reductions shall continue to be made to the extent necessary so that the total reduction equals the excess aggregate contributions amount.

    (B) Corrective Distributions and Forfeitures.  With respect to the Matching Contributions to be reduced on behalf of Participants who are highly compensated employees as described in subparagraph (2)(A) above, the Committee shall distribute within 2¹/2 months after the end of the Plan Year for which the adjustment is made, if possible, but no later than the last day of the subsequent Plan Year, the portion of such Matching Contributions plus any income and minus any loss allocable thereto in which the Participant would be vested if he or she terminated employment on the last day of such Plan Year (or earlier if such Participant actually terminated employment at any earlier date), and the portion of such Matching Contributions in which the Participant would not be vested plus any income and minus any loss allocable thereto shall be forfeited. The amount of any income or loss allocable to any such reductions to be so distributed or forfeited shall be determined pursuant to applicable regulations promulgated by the U.S. Department of Treasury. Any amounts forfeited pursuant

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to this paragraph shall be treated in the same manner as forfeitures described in Section 8.3(c). The unadjusted amount of any such reductions so distributed shall be treated as "annual additions" for purposes of Section 7.5 relating to the limitations under section 415 of the Code.

    (3)  Adjustments to Comply with the Aggregate Limit.  If, after making the adjustments required by paragraphs (1) and (2) of this subsection for a Plan Year, the Committee determines that the sum of the Average Deferral Percentage and the Average Contribution Percentage for the group consisting of Participants who are highly compensated employees exceeds the Aggregate Limit for such Plan Year, then the Committee shall adjust the Salary Deferral Contributions made for such Plan Year on behalf of each Participant who is a highly compensated employee to the extent necessary to eliminate such excess. Such adjustment shall be effected in the same manner described in paragraph (1) of this subsection and in accordance with section 401(k)(8)(B) of the Code. In the event that further reductions are necessary, the Committee shall adjust the Matching Contributions made pursuant to Section 4.4 for such Plan Year on behalf of each Participant who is a highly compensated employee to the extent necessary to eliminate such excess. Such adjustment shall be effected in the same manner described in paragraph (2) of this subsection and in accordance with section 401(m)(6)(B) of the Code.

    (f)  Designation of Qualified Nonelective Contributions and Qualified Matching Contributions.  Each Plan Year, the Committee may require some or all of the Employers to make, to the extent permitted by the Secretary of the U.S. Department of Treasury, a "qualified nonelective contribution," within the meaning of section 401(m)(4)(C) of the Code, or a "qualified matching contribution," within the meaning of U.S. Treasury Regulation §1.401(k)-1(b)(5), to the Plan for purposes of applying the tests set forth in Section 4.5(a) or (b) (or both). Any qualified nonelective contribution to the Plan shall be allocated to the accounts of those Participants who are not highly compensated employees (as defined in Section 4.5(d)) for the Plan Year with respect to which such qualified nonelective contribution is made and who are actively employed by the contributing Employer on the date such contribution is made, beginning with the Participant with the lowest Compensation for such Plan Year and allocating the maximum amount permissible under Section 7.5 of the Plan before allocating any portion of such qualified nonelective contribution to the Participant with the next lowest Compensation. Such allocation shall continue until the Plan satisfies the requirements in Section 4.5(a) and (b) of the Plan or until the amount of such qualified nonelective contribution has been completely allocated. Qualified matching contributions shall be allocated to the accounts of Participants who are not highly compensated employees (as defined in Section 4.5(d)) for the Plan Year with respect to which such qualified matching contribution is made and who are actively employed on the date such contribution is made as a percentage of all or a portion of each such employee's Salary Deferral Contributions as shall be designated by the Company.

    Section 4.6.  Limitation on Employer Contributions.  The contributions of an Employer for any Plan Year shall not exceed the maximum amount for which a deduction is allowable to such Employer for federal income tax purposes for the fiscal year of such Employer that ends with or within such Plan Year.

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    Any contribution made by an Employer by reason of a good faith mistake of fact, or the portion of any contribution made by an Employer that exceeds the maximum amount for which a deduction is allowable to such Employer for federal income tax purposes by reason of a good faith mistake in determining the maximum allowable deduction, shall upon the request of such Employer be returned by the Trustee to the Employer. An Employer's request and the return of any such contribution must be made within one year after such contribution was mistakenly made or after the deduction of such excess portion of such contribution was disallowed, as the case may be. The amount to be returned to an Employer pursuant to this paragraph shall be the excess of (i) the amount contributed over (ii) the amount that would have been contributed had there not been a mistake of fact or a mistake in determining the maximum allowable deduction. Earnings attributable to the mistaken contribution shall not be returned to the Employer, but losses attributable thereto shall reduce the amount to be so returned. If the return to the Employer of the amount attributable to the mistaken contribution would cause the balance of any Participant's account as of the date such amount is to be returned (determined as if such date coincided with the close of a Plan Year) to be reduced to less than what would have been the balance of such account as of such date had the mistaken amount not been contributed, the amount to be returned to the Employer shall be limited so as to avoid such reduction.

ARTICLE 5

ROLLOVER CONTRIBUTIONS

    Section 5.1.  Requirements for Rollover Contributions.   If an Employee receives an eligible rollover distribution (within the meaning of section 402(c)(4) of the Code) from a qualified trust (within the meaning of section 402(c)(8)(A) of the Code), then such Employee may contribute to this Plan an amount which does not exceed the amount of such eligible rollover distribution. If an Employee receives a distribution or distributions from an individual retirement account (within the meaning of section 408 of the Code) and the amount received represents the entire amount in such account and no amount in such account is attributable to any source other than an eligible rollover distribution or a "qualified total distribution" (within the meaning of section 402(a)(5)(E)(i) of the Code as in effect prior to January 1, 1993) and any earnings on such a rollover contribution, then such Employee may contribute to this Plan such distribution or distributions. An Employee may make a Rollover Contribution pursuant to this Article prior to the date on which he or she satisfies the eligibility requirement described in Section 3.1.

    Section 5.2.  Delivery of Rollover Contributions.  Any Rollover Contribution made pursuant to this Article shall be delivered by the Participant to the Committee and by the Committee to the Trustee on or before the 60th day after the day on which the Participant receives the distribution, or on or before such later date as may be prescribed by law. Any such contribution must be accompanied by (i) a statement of the Participant that to the best of his or her knowledge the amount so transferred meets the conditions specified in this Section and (ii) a copy of such documents as may have been received by the Participant advising him or her of the amount of and the character of such distribution. Notwithstanding the foregoing, the Committee shall not accept a Rollover Contribution if in its judgment accepting such contribution would cause the Plan to violate any provision of the Code or regulations promulgated by the U.S. Department of Treasury.

    Section 5.3.  Special Accounting Rules for Rollover Contributions.  An Employee's Rollover Contribution shall be credited to such Employee's Rollover Account as of the date on which such contribution is received by the Trustee. If such contribution is made by an Employee prior to his or her becoming a Participant, then until such time as the Employee becomes a Participant he or she shall be deemed to be a Participant for all purposes of the Plan except for the purposes of electing Salary Deferral Contributions and sharing in allocations of Profit Sharing Contributions, Matching Contributions or any other Employer contributions pursuant to Article 4. Upon making a Rollover

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Contribution to the Plan as described in this Article 5, an Employee shall make an investment election in the time and manner prescribed by the Committee (in multiples established by the Committee from time to time) which shall apply to the investment of such Rollover Contribution. Notwithstanding anything contained herein to the contrary, any future changes in investment elections made pursuant to Section 7.1(c)(i) shall supersede the original investment election applicable to any Rollover Contribution made pursuant to this Section 5.3. The "annual additions" to a Participant's accounts, as defined in Section 7.5, shall not include any Rollover Contribution made to the Plan pursuant to this Article.

ARTICLE 6

TRUST AND INVESTMENT FUNDS

    Section 6.1.  Trust.  A Trust created by the execution of a trust agreement between the Company (acting on behalf of the Employers pursuant to Section 12.4) and the Trustee has been established to receive, hold, invest and dispose of the assets of the Trust Fund. All contributions under the Plan shall be paid to the Trustee. The Trustee shall hold all monies and other property received by it and invest and reinvest the same, together with the net income therefrom, on behalf of the Participants collectively in accordance with the provisions of the trust agreement. The Trustee shall make distributions from the Trust Fund at such time or times to such person or persons and in such amounts as the Committee directs in accordance with the Plan.

    Section 6.2.  Investment Funds.

    (a)  In General.  The Committee shall cause the Trustee to establish, operate and maintain three or more separate investment funds exclusively for the collective investment and reinvestment of moneys directed by the Participants to be invested in such funds on their behalf. Additional investment funds may be established as determined by the Committee from time to time, in its sole discretion.

    (b) Company Stock Fund.  The Committee shall cause the Trustee to establish, operate and maintain a Company Stock Fund. The assets of the Company Stock Fund shall be invested primarily in shares of Company Stock and short-term liquid investments in a commingled money market fund maintained by the Trustee, to the extent determined by the Trustee to be necessary to satisfy such fund's cash needs. In making purchases or sales of shares of Company Stock for the Company Stock Fund, the Trustee shall purchase or sell shares of Company Stock in the manner and in the proportion as prescribed by the Committee in accordance with rules adopted for such purpose.

ARTICLE 7

PARTICIPANT ACCOUNTS

    Section 7.1.  Participant Accounts and Investment Elections.

    (a)  Participant Accounts.  Separate accounts shall be maintained for each Participant. The accounts maintained for a Participant, to the extent applicable, shall consist of (i) a Profit Sharing Account, to which shall be credited the portion of the Participant's account balance attributable to Profit Sharing Contributions made prior to the Merger Date and all Profit Sharing Contributions made on behalf of the Participant pursuant to Section 4.1, (ii) a Salary Deferral Contributions Account, to which shall be credited all Salary Deferral Contributions made pursuant to Section 4.2, (iii) a Matching Contributions Account, to which shall be credited all Matching Contributions made pursuant to Section 4.4, (iv) a Rollover Account, to which shall be credited all Rollover Contributions made pursuant to Article 5, (v) an After-Tax Account, to which shall be credited all after-tax contributions transferred to the Plan from the FHC Plan and the QualMed Plan (or any other plan qualified under section 401(a) of the Code), (vi) a Qualified Nonelective Contribution Account and (vii) a Qualified

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Matching Contribution Account. Unless the context otherwise requires, a Participant's "account balance" shall mean the aggregate value of all separate accounts maintained for such Participant pursuant to the Plan and Trust. A Participant shall be fully vested at all times in his or her Salary Deferral Contributions Account, Rollover Account, After-Tax Account, Qualified Nonelective Contribution Account and Qualified Matching Contribution Account under the Plan. A Participant shall be vested in his or her Profit Sharing Account and Matching Contributions Account only to the extent provided in Section 8.1. Each account shall, to the extent appropriate, be composed of (i) investment subaccounts in respect of each investment fund to which amounts contributed under the Plan shall be credited pursuant to subsections (b), (c) and (d) of this Section and (ii) administrative subaccounts in respect of accounts transferred to the Plan from other plans qualified under section 401(a) of the Code. Such accounts and subaccounts shall be solely for accounting purposes, and there shall be no segregation of assets of the Trust or of any separate investment fund among separate accounts. The books of account, forms and accounting methods used in the administration of Participants' accounts shall be the responsibility of, and shall be subject to the supervision and control of, the Committee.

    (b)  Initial Investment Election.  Except as set forth in Sections 5.3 and 7.2, each Participant, as part of his or her commencement of participation shall make an investment election, in the time and manner prescribed by the Committee, that shall apply to the investment of (i) Profit Sharing Contributions credited to such Participant's account and any earnings thereon, (ii) Salary Deferral Contributions made on such Participant's behalf under the Plan, and any earnings thereon, (iii) Matching Contributions made on such Participant's behalf under the Plan, and any earnings thereon, (iv) Rollover Contributions made by the Participant under the Plan and any earnings thereon and (v) any qualified nonelective contributions or qualified matching contributions and any earnings thereon. A single investment election shall apply to all such contributions and earnings thereon, unless the Committee prescribes rules for separate investment elections to be made with respect to any such contributions and earnings. Such elections shall specify that such contributions, and earnings thereon, be invested either (i) wholly in one of the funds maintained or employed by the Trustee pursuant to Section 6.2(a) or (ii) divided among such funds in multiples established by the Committee from time to time. During any period in which no direction as to the investment of a Participant's account is on file with the Committee, contributions made by such Participant or on his or her behalf to the Plan shall be invested in such manner as the Committee shall determine.

    (c)  Change of Investment Election.  Except as set forth in Section 7.2, a Participant may elect to change his or her investment election at such intervals as may be determined by the Committee in the time and the manner prescribed by the Committee (in multiples established by the Committee from time to time). Such change shall be limited to the investment funds then maintained or employed by the Trustee pursuant to Section 6.2(a). A Participant may change his or her investment election in the time and manner designated by the Committee among the funds maintained pursuant to Section 6.2(a), with respect to (i) contributions and earnings thereon made on behalf of or by the Participant under Article 4 or Article 5 prior to such change, (ii) to future contributions made pursuant to such Articles, or (iii) both.

    Section 7.2.  Investments in Company Stock Fund.

    (a)  Election of Investments in Company Stock Fund.   Notwithstanding the provisions of Section 7.1:

(1)

A Participant's election to invest any portion of his or her account balance in the Company Stock Fund shall apply only to contributions made to the Plan on and after the date such election becomes effective.

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(2)

The percentage of any contribution that is invested in the Company Stock Fund shall not exceed 20%, or such other percentage as may be prescribed by the Committee from time to time.



(3)

An Employee whose compensation is determined by the Compensation and Stock Option Committee pursuant to the bylaws of the Company shall not be permitted to elect the investment of any portion of his or her account balance in the Company Stock Fund.



(4)

Profit Sharing Contributions credited to a Participant's account for Plan Years beginning prior to January 1, 1998 shall be invested in the Company Stock Fund, and shall not be subject to the election of such Participant.

    (b)  Crediting of Company Stock Fund Subaccount.  As of the Valuation Date coinciding with or next following the date an amount is credited to a Company Stock Fund subaccount, such subaccount shall be credited with the number of whole and fractional shares of Company Stock which have a fair market value as of such Valuation Date equal to the amount credited to such subaccount. For this purpose, the price of each share of Company Stock shall be the average of the prices paid by the Trustee for shares of Company Stock on such Valuation Date.

    Section 7.3.  Valuation of Funds and Plan Accounts.   The value of an investment fund as of any Valuation Date shall be the market value of all assets (including any uninvested cash) held by the fund as determined by the Trustee, reduced by the amount of any accrued liabilities of the fund on such Valuation Date. The Trustee's determination of market value shall be binding and conclusive upon all parties.

    The value of a Participant's Plan accounts as of any Valuation Date shall be the sum of the values of his or her investment subaccounts in each of the Participant's Profit Sharing Account, Salary Deferral Contributions Account, Matching Contributions Account, Rollover Account, After-Tax Account, Qualified Nonelective Contributions Account and Qualified Matching Contributions Account. The Committee shall furnish to each Participant, not less frequently than annually, a statement setting forth the balances in the Plan accounts of such Participant.

    Section 7.4.  Allocation of Contributions and Forfeitures Among Participants' Accounts.

    (a)  Allocation of Profit Sharing Contributions.  A portion of a Profit Sharing Contribution made by an Employer pursuant to Section 4.1 for a Plan Year shall be allocated to the Profit Sharing Account of each Participant who was an Employee of the Employer that made such Profit Sharing Contribution and who (i) was an Eligible Employee on the last day of the Plan Year, (ii) first incurred a Disability within such Plan Year or (iii) terminated employment with the Employer during the Plan Year on account of death or after attaining age 55. Such portion shall be allocated to each such Participant's Profit Sharing Account in proportion to the Participant's Compensation payable by such Employer for the Plan Year compared to the Compensation payable for the Plan Year to either (i) all Participants employed by such Employer or (ii) all Participants employed by the Employers, as determined by the Company. Profit Sharing Contributions shall be allocated to the Profit Sharing Account of each such Participant as of the date on which such contributions are delivered to the Trustee.

    (b)  Allocation of Salary Deferral Contributions.  A Participant's Salary Deferral Contributions made pursuant to Section 4.2 shall be allocated to the Participant's Salary Deferral Contributions Account as of the date on which such contributions are delivered to the Trustee.

    (c)  Allocation of Matching Contributions.  Matching Contributions made pursuant to Section 4.4 shall be allocated to the Matching Contributions Account of each Participant for whom such contributions are made as of the date on which such contributions are delivered to the Trustee.

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    (d)  Allocation of Rollover Contributions.  Subject to the special accounting rules contained in Section 5.3, a Rollover Contribution made pursuant to Article 5 shall be allocated to the Rollover Account of the Participant who makes such contribution as soon as practicable after the date on which such contribution is delivered to the Trustee.

    (e)  Allocation of Forfeitures.  The excess, if any, of (i) the amounts forfeited in a Plan Year pursuant to Section 8.1(c) by all Participants employed by an Employer over (ii) the amount of such forfeitures applied to restore previous forfeitures as provided in Section 9.3(b) shall be allocated and credited to Profit Sharing Accounts in the next following Plan Year in the manner described in subsection (a) above, so as to reduce the amount which such Employer contributes to the Plan in such Plan Year pursuant to Section 4.1. If such forfeited amounts exceed the amount of such Employer's Profit Sharing Contribution for such Plan Year, then any remaining forfeited amounts shall be allocated to the Matching Contribution Accounts of Participants employed by such Employer during such Plan Year, in the manner described in subsection (c) above, so as to reduce the amount which such Employer contributes to the Plan for such Plan Year pursuant to Section 4.4.

    Section 7.5.  Statutory Limitations on Allocations to Accounts.  Notwithstanding any other provision of the Plan, the amount allocated to a Participant's accounts under the Plan for each Plan Year shall be limited as follows:

    (1) the aggregate annual additions to such accounts and to the Participant's accounts in all other defined contribution plans maintained by an employer shall not exceed the lesser of (A) $30,000 (as adjusted in accordance with section 415(d) of the Code) and (B) twenty-five percent (25%) of the Participant's compensation for such Plan Year; and

    (2) with respect to Plan Years commencing prior to January 1, 2000, the sum of (A) and (B) below shall not exceed 1.

    (A) The sum of the separate amounts determined as follows for each Plan Year during which the Participant shall have participated in the Plan or in any other defined contribution plans maintained by an employer (computed as of the close of the Plan Year for which such computations are made):

    (I) the aggregate annual additions to the Participant's accounts in all of such plans for each such Plan Year, divided by

    (II) the lesser of (i) 125 percent (125%) of the maximum dollar amount under section 415(c)(1)(A) of the Code, and (ii) 35 percent (35%) of the Participant's compensation, for each such Plan Year, respectively.

    (B) The aggregate projected annual benefit of the Participant under all defined benefit plans maintained by an employer (determined as of the close of the Plan Year for which such computations are made) divided by the lesser of

    (I) 125 percent (125%) of the maximum dollar limitation contained in section 415(b)(1)(A) of the Code (as adjusted for increases in the cost-of-living pursuant to section 415(d) of the Code), and

    (II) 140 percent (140%) of the average of the Participant's compensation for the three consecutive calendar years of his or her participation in such defined benefit plans during which his or her compensation was the highest.

    If as a result of the allocation of amounts to Participant's accounts pursuant to Section 7.4 for a Plan Year, a reasonable error in estimating a Participant's compensation, a reasonable error in determining the amount of elective deferrals (within the meaning of section 402(g)(3) of the Code) that may be made with respect to a Participant under the limits of section 415 of the Code, or under other

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limited facts and circumstances as determined by the Commissioner of Internal Revenue, the annual additions to a Participant's accounts would exceed the limitations set forth above for any Plan Year:

    (i)  Salary Deferral Contributions made pursuant to Section 4.2 (plus any income and minus any loss allocable thereto) shall be distributed to the Participant to the extent necessary to comply with such limitations, and if such limitations would still be exceeded after returning such contributions,

    (ii) the amount of annual additions in excess of such limitations (after making the distributions under clause (i) above) shall be held in a segregated suspense account which shall be invested but shall not be credited or debited with its own gains or losses and shall not share in gains or losses of the Trust, and which shall be treated in each succeeding Plan Year until exhausted as a Matching Contribution or Profit Sharing Contribution, thereby reducing amounts actually contributed by the Employer for such year. The balance, if any, in such suspense account shall be returned to the Employer upon termination of the Plan only if the allocation upon Plan termination of such amount to Participants would cause all Participants to receive annual additions in excess of the limitations of section 415 of the Code.

    For purposes of this Section 7.5, the "annual additions" for a Plan Year to a Participant's accounts under the Plan and under any other defined contribution plan maintained by an employer is the sum during such Plan Year of:

    (i)  the value of allocations made to such Participant's accounts pursuant to Section 7.4 including any Excess Salary Deferral Contributions distributed in accordance with Section 4.3),

    (ii) the amount of all other employer contributions (within the meaning of section 415(c) of the Code) and forfeitures, if any, allocated to such Participant's accounts under all other defined contribution plans maintained by an employer,

    (iii) the amount of contributions by the Participant to any such plan (excluding any rollover contributions as defined in sections 402(c), 403(a)(4), 403(b)(8) and 408(d)(3) of the Code), and

    (iv) contributions allocated on behalf of the Participant to any individual medical benefit account that is part of a pension or annuity plan within the meaning of section 415(l) of the Code.

For purposes of this Section 7.5, the terms "compensation," "defined contribution plan," "projected annual benefit" and "defined benefit plan" shall have the meanings set forth in section 415 of the Code (as amended from time to time), and the term "employer" shall include all corporations and entities determined under section 414(b) and (c) of the Code as modified by section 415(h) of the Code.

    Section 7.6.  Correction of Error.   If it comes to the attention of the Committee that an error has been made in any of the allocations prescribed by this Article 7 or in the crediting of any amount to a Participant's account or in any other manner, then appropriate adjustment shall be made to the accounts of all Participants and designated Beneficiaries that are affected by such error, except that no adjustment need be made with respect to any Participant or Beneficiary whose account has been distributed in full prior to the discovery of such error. Correction of such error may be made by any method deemed appropriate by the Committee applied in a nondiscriminatory manner and may include discretionary or nonelective contributions by an Employer.

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ARTICLE 8

WITHDRAWALS, LOANS AND DISTRIBUTIONS

    Section 8.1.  Vesting.

    (a)  In General.  A Participant who terminates employment after the Effective Date shall be entitled upon his termination of employment to the entire balance of the Participant's Salary Deferral Contributions Account, Rollover Account, After-Tax Account, Qualified Nonelective Contributions Account and Qualified Matching Contributions Account, and a percentage of his or her Profit Sharing Account and Matching Contributions Account determined by reference to the number of the Participant's years of Service, in accordance with the following schedule:

Years of Service	Percentage of Profit Sharing and Matching Contributions Accounts
less than 1	0	%
at least 1, but less than 2	25	%
at least 2, but less than 3	50	%
3 or more	100	%

Notwithstanding the foregoing, a Participant shall become 100% vested in his account balance upon his death, attainment of age 55 or, when the Committee makes a determination that the Participant has a Disability.

    (b)  Grandfathered Vesting Schedules.  Each Eligible Employee who was a participant in the FHC Plan immediately prior to the Effective Date of the September 1, 1997 amendment and restatement of the Plan and had commenced employment with an employer in the FHC Plan prior to January 1, 1995 shall be vested in his or her Profit Sharing Account and Matching Contributions Account in accordance with the following schedule:

Years of Service	Percentage of Profit Sharing and Matching Contributions Accounts
less than 1	0	%
at least 1, but less than 2	34	%
at least 2, but less than 3	67	%
3 or more	100	%

The vesting schedule set forth in this paragraph (ii) shall not apply, however, to any participant in the FHC Plan who was employed by Intergroup HealthCare Corporation of Utah, Intergroup HealthCare Corporation of Arizona, Gem Holding Company (or any of its affiliates) or CareFlorida on the date that Foundation Health Corporation first owned, directly or indirectly, at least 80% of the stock of such Employer.

    (c)  Forfeitures.  If upon a Participant's termination of employment the Participant is not fully vested in the balance of his or her Profit Sharing Account or Matching Contributions Account, then the difference between the value of each such account and the amount distributable with respect thereto under subsection (a) or (b) of this Section shall be charged to such account and forfeited. Such forfeiture shall occur as of the Valuation Date coinciding with or next following the earlier of (i) the date the Participant takes a distribution of his or her vested interest in such account as provided in Section 8.5 and (ii) the date as of which the Participant incurs a Break in Service of five consecutive years. For purposes of the preceding sentence, a Participant who does not have a vested interest in his or her Profit Sharing Account or Matching Contributions Account (or both) shall be deemed to have received a distribution of such account as of the date of such Participant's termination of employment.

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If such Participant is reemployed prior to incurring a Break in Service of five consecutive years, then such forfeiture shall be reinstated as prescribed in Section 9.3(b).

    Section 8.2.  Withdrawals Prior to Termination of Employment.

    (a)  Withdrawals of After-Tax and Rollover Accounts. While a Participant is an Employee, the Participant may at any time, by instructions at the time and in the manner prescribed by the 401(k) Administrator, make a request to withdraw all or any part of the value of the balances credited to his or her After-Tax Account and Rollover Account. A Participant shall not be permitted to withdraw any portion of his or her After-Tax Account or earnings thereon more frequently than once during any calendar year.

    (b)  Withdrawals After Age 59¹/2.  Upon attaining age 59¹/2, a Participant may at any time, by instructions at the time and in the manner prescribed by the 401(k) Administrator, make a request to withdraw any portion of the Participant's vested interest in his or her accounts under the Plan.

    (c)  Hardship Withdrawals.  A Participant who has incurred a financial hardship while he or she is an Employee and who has not attained age 59¹/2 may withdraw any portion of the balance of his or her Salary Deferral Contributions Account and any portion of the Participant's vested interest in his or her Matching Contributions Account in an amount necessary to satisfy the financial hardship, provided that such portion is not held as collateral for an outstanding plan loan. The determination of whether a financial hardship exists and the amount required to be distributed to satisfy the need created by the hardship will be made by the 401(k) Administrator in a uniform and non-discriminatory manner according to the following rules:

    (A) A financial hardship shall be deemed to exist if the Participant certifies to the 401(k) Administrator that the financial need is on account of:

    (i)  expenses for medical care described in section 213(d) of the Code previously incurred by the Participant, the Participant's spouse, or any dependents of the Participant (as defined in section 152 of the Code) or necessary for these persons to obtain medical care described in section 213(d) of the Code;

    (ii) costs directly related to the purchase of a principal residence for the Participant (excluding mortgage payments);

    (iii) payment of tuition, related educational fees, and room and board expenses, for the next 12 months of post-secondary education for the Participant, the Participant's spouse, the Participant's children, or any dependents of the Participant (as so defined);

    (iv) payments necessary to prevent the eviction of the Participant from the Participant's principal residence or foreclosure on the mortgage on that residence; or

    (v) such other immediate and heavy financial needs as determined by the Commissioner of the Internal Revenue Service and announced by publication of revenue rulings, notices or other documents of general applicability.

    (B) A distribution shall be deemed necessary to satisfy a financial need if (i) the distribution is not in excess of the amount of the immediate and heavy financial need to the Participant, as determined by the 401(k) Administrator, and (ii) the Participant has obtained all distributions (including withdrawals from the Participant's After-Tax Account and Rollover Account), other than hardship distributions, and all nontaxable loans currently available under all plans maintained by the Participant's Employer, if any. The Participant shall be required to submit any supporting documentation as may be requested by the 401(k) Administrator.

    (C) Notwithstanding any provision of the Plan to the contrary, a Participant who receives a hardship distribution hereunder shall be prohibited from making any Salary Deferral Contributions

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under Section 4.2 until the first payroll period following the first Entry Date which is at least 12 months after the date of the hardship distribution. Such a Participant may elect to resume making Salary Deferral Contributions in accordance with the procedures established by the 401(k) Administrator pursuant to Section 4.2. For purposes of Section 4.3, the applicable limit for the Plan Year following the Plan Year in which the hardship distribution is made shall be the limit as in effect under section 402(g) of the Code for such year less the amount of Salary Deferral Contributions made by the Participant under Section 4.2 during the Plan Year in which the hardship distribution is made.

    (D) Notwithstanding anything herein to the contrary, earnings after December 31, 1988 credited to a Participant's Salary Deferral Contributions Account shall not be available for withdrawal pursuant to this subsection. The Participant shall give the 401(k) Administrator notice of such Participant's intent to make any such withdrawal permitted by this subsection in the time and manner prescribed by the 401(k) Administrator.

    (d)  Miscellaneous Rules Relating to Withdrawals.  For purposes of determining the value of a Participant's account balance under the Plan for purposes of this Section, the Participant's account balance shall be valued as of the date the Participant's request for a withdrawal is received by the 401(k) Administrator in acceptable form and substance, or such other date prescribed by the 401(k) Administrator in conjunction with the Plan's recordkeeper (such date to be applied in a uniform manner), and shall be paid within a reasonable period of time after the withdrawal request is received by the recordkeeper. All withdrawals under this Section shall be paid in cash. For purposes of this paragraph, the value of a Participant's accounts shall be determined by excluding the portion credited to the Participant's loan fund subaccount under Section 8.3(b), if any. To the extent permitted by the 401(k) Administrator, a Participant who elects a withdrawal under this Section shall designate the extent to which any such withdrawal shall be made from the various investment funds in which his or her account balance is invested, but absent any such designation such withdrawal shall be made from such funds as the 401(k) Administrator shall, in its sole discretion, determine. The amount of any withdrawal pursuant to this Section shall not be less than $500 or, if lesser, the value of the Participant's account from which the withdrawal is made. Notwithstanding the foregoing, a Participant whose compensation is determined by the Compensation and Stock Option Committee pursuant to the by-laws of the Company shall not be permitted to elect a withdrawal pursuant to this Section 8.2 from such Participant's Profit Sharing Contributions Account to the extent such account is invested in the Company Stock Fund.

    Section 8.3.  Loans to Participants.

    (a)  Making of Loans.  Subject to the restrictions set forth in this Section, the 401(k) Administrator shall establish a loan program whereby any Participant who is an Employee may request pursuant to procedures established by the 401(k) Administrator, to borrow funds from the Plan. The principal balance of such loan shall be not less than $1,000 and shall not exceed the lesser of (1) 50 percent (50%) of the aggregate of the Participant's vested account balances as of the Valuation Date coinciding with or immediately preceding the day on which the loan is made, and (2) $50,000, reduced by the excess, if any, of the highest outstanding loan balance of the Participant under all plans maintained by the Employer during the period of time beginning one year and one day prior to the date such loan is to be made and ending on the date such loan is to be made over the outstanding balance of loans from all such plans on the date on which such loan was made.

    (b)  Restrictions.  Amounts equal to any such loan shall be debited proportionately from each of the Participant's accounts and investment subaccounts (other than subaccounts invested in the Company Stock Fund), subject to any other ordering rules adopted by the Committee. Each loan

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approved by the 401(k) Administrator shall be subject to the loan program and only upon the following terms and conditions:

    (1) The period for repayment of the loan shall not exceed five years from the date of the loan; provided, however, that if the purpose of the loan, as determined by the 401(k) Administrator, is to acquire any dwelling unit that within a reasonable period of time is to be used as the principal residence of the Participant, then such period for repayment may exceed five (5) years to the extent permitted by the 401(k) Administrator, but not to exceed 15 years.

    (2) Each loan shall be secured by an assignment of a portion of the Participant's vested benefit under the Plan at least equal to the initial principal amount of such loan and such other collateral as may be required by the 401(k) Administrator.

    (c)  Applicability.  The provisions of this Section 8.3 shall apply to any person who is a Participant but who is not an Employee and any Beneficiary of a deceased Participant if such Participant or Beneficiary is a "party in interest" as defined in section 3(14) of ERISA. The grant of a loan pursuant to this Section 8.3 and the terms and conditions thereof shall apply to any such Participant or Beneficiary in the same manner as to a Participant who is an Employee, except that the requirements of Section 8.3(b)(2) shall be met with respect to each such Participant and Beneficiary if such Participant or Beneficiary consents to have such loan repaid in substantially equal installments as determined by the 401(k) Administrator, but not less frequently than quarterly.

    Section 8.4.  Distribution Upon Termination of Employment.  Except as provided in Sections 8.1(b) and 8.10, a Participant or his or her designated Beneficiary, as the case may be, shall be entitled to receive the Participant's entire vested account balance as soon as administratively practicable following the date of the Participant's termination of employment.

    Section 8.5.  Time and Form of Distribution upon Termination of Employment.

    (a)  Normal Form of Distribution.  Unless a Participant or a Beneficiary elects an optional form of distribution as described in subsection (b), any distribution upon termination of a Participant's employment shall be made by the Trustee at the direction of the 401(k) Administrator by payment in a lump sum in cash.

    (b)  Optional Forms of Distribution.  (1) A Participant who has completed at least one Hour of Service after August 22, 1984 and whose Plan accounts contain amounts transferred to the HSI Plan prior to the Merger Date from a qualified plan (within the meaning of sections 501(a) and 401(a) of the Code) may elect to receive a distribution of the vested portion of his or her Plan accounts in the form of a single premium annuity in an amount equal to such transferred amounts. Such an annuity shall provide for payments over the life of the Participant, if the Participant is not married, or the joint lives of the Participant and the Participant's spouse if the Participant is married. An annuity providing for payments over the joint lives of the Participant and the Participant's spouse shall provide for equal monthly payments for the Participant's life, and after the Participant's death, for monthly payments equal to 50 percent (50%) of such payments for the life of the Participant's spouse. A Participant who elects a distribution in the form of an annuity shall be subject to the election procedures described in Section 8.6.

    (2) A Participant who immediately prior to the Merger Date was a participant in the FHC Plan and who on the Merger Date is a Participant in the Plan may elect to receive a distribution of the vested portion of his or her Plan accounts in an amount equal to the Participant's account balance in the FHC Plan immediately prior to the Merger Date in a series of quarterly, semiannual or annual installments of substantially nonincreasing designated amounts over a period of years certain. The amount of each installment payment shall be adjusted, in accordance with the payment frequency elected by the Participant, so that the Participant's account is exhausted as of the end of the payment period.

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    (3) A Participant who (i) immediately prior to the Merger Date was a participant in the FHC Plan, (ii) participated in the FHC Plan before January 1, 1997, and (iii) is a Participant in the Plan on the Merger Date may elect to receive a distribution hereunder in the form of a single premium annuity in an amount equal to balance of the Participant's Plan accounts on the Merger Date. Such an annuity shall provide for payments over the life of the Participant or the joint lives of the Participant and a Beneficiary designated by the Participant. An annuity providing for payments over the joint lives of the Participant and the Participant's Beneficiary shall provide for equal monthly payments for the Participant's life, and after the Participant's death, for monthly payments equal to 50 percent (50%) of such payments for the life of the Participant's Beneficiary. A Participant who elects a distribution in the form of an annuity shall be subject to the election procedures described in Section 8.6.

    (4) Participant who (i) immediately prior to the Merger Date was a participant in the FHC Plan with an account balance attributable to his or her employment by Managed Health Network, Inc. prior to January 1, 1997 and (ii) is a Participant in the Plan on the Merger Date may elect to have the balance of his or her Plan accounts on the Merger Date be used to purchase one of the following two types of annuity contracts:

    (A) A ten year certain and life annuity providing equal monthly payments for the Participant's life, and in the event the Participant dies before 120 monthly payments have been paid, annuity payments in the same amount to the Participant's Beneficiary commencing on the first day of the month following the month in which the Participant's death occurs and continuing until an aggregate of 120 monthly payments have been made to the Participant and the Participant's Beneficiary.

    (B) A single premium annuity providing for payments over the life of the Participant, if the Participant is not married, or the joint lives of the Participant and the Participant's spouse if the Participant is married. An annuity providing for payments over the joint lives of the Participant and the Participant's Beneficiary shall provide for equal monthly payments for the Participant's life, and after the Participant's death, for monthly payments equal to 100 percent (100%) of such payments for the life of the Participant's Beneficiary.

A Participant who elects an annuity contract described in either paragraph (A) or (B) shall be subject to the election procedures described in Section 8.6.

    (c)  Small Benefits Payable in Lump Sum.  Notwithstanding any provision of the Plan to the contrary, if the vested balance of a Participant's Plan accounts does not exceed $5,000 (or such other amount prescribed by section 411(a)(11) of the Code) (such amount referred to herein as the "small benefit amount"), then such balance shall be distributed in a lump sum cash payment after the Participant's termination of employment in accordance with administrative practices and procedures. For purposes of this subsection (c), to the extent required by law, if at the time a Participant is scheduled to receive the first payment in a series of installment payments (as described in Section 8.4(b)(2)) the value of such Participant's account balance exceeds $5,000, then such account balance will be deemed to exceed $5,000 at the time of any subsequent installment payment.

    (d)  Time of Distribution.  Except as provided in Section 8.10, upon a Participant's termination of employment, the payment of a lump sum shall be made, or installment or annuity payments shall commence, as the case may be, as soon as administratively feasible on the Valuation Date occurring on or immediately after the date on which such termination of employment occurs or at such later time as the Participant or his or her Beneficiary, as the case may be, shall elect, which election may be changed as of any Valuation Date by advance written notice to the Committee, provided, however, that:

    (1) subject to Section 8.5(c), no payments shall be made before the Participant's 65th birthday unless the Participant has consented in writing;

23

    (2) in the case of a Participant who does not elect any distribution to which such Participant becomes entitled upon termination of employment, distribution shall be made to such Participant by payment in a lump sum no later than 60 days after the end of the Plan Year which contains the later of (i) the date of the Participant's termination of employment and (ii) the Participant's 65th birthday, and;

    (3) distributions commencing after the Participant's death shall be completed within five years after the death of the Participant, except that (i) if the Participant's Beneficiary is the Participant's spouse, distribution may be deferred until the last day of the Plan Year in which the Participant would have attained age 69 had he or she survived and (ii) if the Participant's Beneficiary is a natural person other than the Participant's spouse and distributions commence not later than one year after the Participant's death, such distributions may be made over a period not longer than the life expectancy of such Beneficiary. If at the time of the Participant's death, distribution of the Participant's benefit has commenced, the remaining portion of the Participant's benefit shall be paid in the manner elected by the Participant's Beneficiary, but at least as rapidly as was the method of distribution being used prior to the Participant's death;

    (4) with respect to a Participant who continues in employment after attaining age 70¹/2, distribution of the Participant's account balance shall commence no later than the Participant's required beginning date. For purposes of this paragraph, the term "required beginning date" shall mean (i) with respect to a Participant who is a 5%-owner (within the meaning of section 416(i) of the Code), April 1 of the calendar year following the calendar year in which the Participant attains age 70¹/2 and (ii) with respect to any other Participant, April 1 of the calendar year following the calendar year in which the Participant retires. A Participant who (i) is not a 5%-owner, (ii) attained age 70¹/2 before 1997 and (iii) remains in employment with an Employer shall be permitted to elect to cease receiving distributions while the Participant remains in employment with an Employer. If such distributions are paid in the form of a joint and survivor annuity, however, a Participant may elect to cease such distribution only if the spousal consent and other applicable requirements of sections 401(a)(11) and 417 of the Code are satisfied. Distributions made under this paragraph shall be made in the form of installment payments in the minimum amount required by section 401(a)(9) of the Code over a period equal to the life of the Participant, or if applicable, the joint lives of such Participant and the Participant's Beneficiary. Unless the Participant elects otherwise prior to the date on which payment of installments commence pursuant to this paragraph, such period shall be recalculated annually to the extent permitted by regulations promulgated by the U.S. Department of Treasury.

    (e)  Direct Rollover Option.  In the case of a distribution that is an "eligible rollover distribution" within the meaning of section 402(c)(4) of the Code, a distributee may elect that all or any portion of such distribution to which he or she is entitled shall be directly transferred from the Plan to an individual retirement account or annuity described in section 408 of the Code, to another retirement plan qualified under section 401(a) of the Code (the terms of which permit the acceptance of rollover distributions) or to an annuity plan described in section 403(a) of the Code; provided, however, that if the distributee is a surviving spouse of a Participant, such distribution may be transferred only to an individual retirement account or annuity. Notwithstanding the foregoing, a distributee shall not be entitled to elect to have an eligible rollover distribution transferred pursuant to this subsection (i) if the total of all eligible rollover distributions with respect to such distributee for the Plan Year is not reasonably expected to equal at least $200, or (ii) in the case of a partial direct rollover, the portion so rolled over equals at least $500. For purposes of this subsection, the term "distributee" shall mean (i) a Participant, (ii) an alternate payee (within the meaning of section 414(p)(8) of the Code) with respect to a Participant under a qualified domestic relations order or (iii) a surviving spouse of a Participant.

    (f)  Valuation of Accounts.  For purposes of determining the value of a Participant's account balance under the Plan for purposes of this Section, the Participant's account balance shall be valued as

24

of the date the Participant's request for a distribution is received by the Committee in acceptable form and substance, or such other date prescribed by the Committee in conjunction with the Plan's recordkeeper (such date to be applied in a uniform manner).

    Section 8.6.  Special Rules Relating to Election of Annuity Form of Benefit.  The provisions of this Section shall apply only to a Participant who is entitled to receive payment of his or her account in an optional annuity form of benefit described in Section 8.5 and makes an election to receive payment of his or her account in such a form.

    (a)  QJSA Notice.  No less than 30 days (or such shorter period as may be permitted by regulations promulgated by the U.S. Department of Treasury, and as determined by the Committee) and no more than 90 days before the date of distribution, the Committee shall give the Participant by mail or personal delivery written notice a general description of the single premium annuity, a general description of the circumstances under which a single premium annuity contract will be purchased and general information on the amount of each payment under a typical single premium annuity contract. Such notice also shall advise the Participant that, upon written request to the Committee prior to the end of his or her election period, the Participant shall be given a written explanation in nontechnical language of the terms and conditions of the single premium annuity contract, of the other methods of distribution available pursuant to Section 8.5 and of the amount of each payment that he or she would be entitled to receive under such a contract or under the other methods of distribution. Such explanation shall be mailed or personally delivered to the Participant within 30 days from the date the Participant's written request is received by the Committee and the Participant's election period shall end no earlier than 90 days after such explanation is so mailed or delivered.

    (b)  Qualified Pre-Retirement Survivor Annuity.  If the Participant is married and dies after making an election to have his or her account distributed in an annuity form of benefit but prior to his or her annuity starting date, then such Participant's account shall be applied to purchase a single premium annuity contract providing for payment over the lifetime of the Participant's surviving spouse. Notwithstanding the foregoing, the Participant's surviving spouse may elect, in the time and manner prescribed by the Committee, to receive payment of the Participant's account in the form of a single sum, in lieu of a single premium annuity contract.

    (c)  Election and Waiver Procedures.  A Participant may, subject to the last sentence of this paragraph, revoke the annuity form of distribution provided under the Plan at any time during the 90-day period ending on the Participant's benefit commencement date (the "election period"). Such a revocation shall be made by delivering a written notice describing the election, change or revocation to the Committee on a form provided by the Committee for this purpose; provided, however, that if the Participant has been married for the one-year period ending on his or her benefit commencement date, and as a result of such revocation, the Participant's spouse would not be entitled to receive a survivor's benefit at least equal to that provided by the 50 percent (50%) joint and survivor annuity form of benefit, such election shall not be effective unless it shall have been consented to, at the time of such election, revocation or change, in writing by the Participant's spouse and such consent acknowledges the effect of such revocation and is witnessed by either a Plan representative or a notary public, or it is established to the satisfaction of the Committee that such consent cannot be obtained because the Participant's spouse cannot be located or such other circumstances as may be prescribed in regulations promulgated by the U.S. Department of Treasury.

    Section 8.7.  Designation of Beneficiary.  Each Participant shall have the right to designate a Beneficiary or Beneficiaries (who may be designated contingently or successively and that may be an entity other than a natural person) to receive any distribution to be made under Section 8.4 upon the death of such Participant or, in the case of a Participant who dies subsequent to termination of his or her employment but prior to the distribution of the entire amount to which such Participant is entitled under the Plan, any undistributed balance to which such Participant would have been entitled, provided,

25

however, that no such designation (or change thereof) shall be effective if the Participant was married through the one-year period ending on the date of the Participant's death unless such designation (or change thereof) was consented to at the time of such designation (or change thereof) by the person who was the Participant's spouse during such period, in writing, acknowledging the effect of such consent and witnessed by a notary public or a Plan representative, or it is established to the satisfaction of the Committee that such consent could not be obtained because the Participant's spouse cannot be located or such other circumstances as may be prescribed in Regulations. Subject to the preceding sentence, a Participant may from time to time, without the consent of any Beneficiary, change or cancel any such designation. Such designation and each change therein shall be made in the form prescribed by the Committee and shall be filed with the Committee. If (i) no Beneficiary has been named by a deceased Participant, (ii) such designation is not effective pursuant to the proviso contained in the first sentence of this Section, or (iii) the designated Beneficiary has predeceased the Participant, any undistributed balance of the deceased Participant's account shall be distributed by the Trustee at the direction of the Committee (a) to the surviving spouse of such deceased Participant, if any, or (b) if there is no surviving spouse, to the then living children, if any, of the Participant in equal shares, or (c) if there are no such children, to the executor or administrator of the estate of such deceased Participant. The marriage of a Participant shall be deemed to revoke any prior designation of a Beneficiary made by him or her and a divorce shall be deemed to revoke any prior designation of the Participant's divorced spouse if written evidence of such marriage or divorce shall be received by the Committee before distribution of the Participant's account balance has been made in accordance with such designation. If within a period of three years following the death or other termination of employment of any Participant the Committee in the exercise of reasonable diligence has been unable to locate the person or persons entitled to benefits under this Article 8, the rights of such person or persons shall be forfeited, provided, however, that the Plan shall reinstate and pay to such person or persons the amount of the benefits so forfeited upon a claim for such benefits made by such person or persons. The amount to be so reinstated shall be obtained from the total amount that shall have been forfeited pursuant to this Section 8.7 during the Plan Year that the claim for such forfeited benefit is made. If the amount to be reinstated exceeds the amount of such forfeitures, the Employer in respect of whose Employee the claim for forfeited benefit is made shall make a contribution in an amount equal to the remainder of such excess. Any such contribution shall be made without regard to whether or not the limitations set forth in Section 4.6 will be exceeded by such contribution. For purposes of this Section 8.7 only, an individual who is designated by a Participant as such Participant's life partner and satisfies the conditions established by the Committee to be considered the life partner of a Participant shall be deemed and treated as married to, and the spouse of, such Participant. Such designation and any changes thereto shall be made in the form and in the time and manner prescribed by the Committee and shall be filed with the Committee.

    Section 8.8.  Distributions to Minor and Disabled Distributees.  Any distribution under this Article that is payable to a distributee who is a minor or to a distributee who, in the opinion of the Committee, is unable to manage his or her financial affairs by reason of illness or mental incompetency may be made to or for the benefit of any such distributee at such time consistent with the provisions of Section 8.5 and in such of the following ways as the legal representative of such distributee shall direct: (a) directly to any such minor distributee if, in the opinion of such legal representative, he or she is able to manage his or her financial affairs, (b) to such legal representative, (c) to a custodian under a Uniform Gifts to Minors Act for any such minor distributee, or (d) to some near relative of any such distributee to be used for the latter's benefit. Neither the Committee nor the Trustee shall be required to see to the application by any third party other than the legal representative of a distributee of any distribution made to or for the benefit of such distributee pursuant to this Section.

    Section 8.9.  Missing Person.  If within a period of three years following the death or other termination of employment of any Participant the Committee in the exercise of reasonable diligence has been unable to locate the person or persons entitled to benefits under this Article 8, then the rights

26

of such person or persons shall be forfeited, and, subject to the following sentence, the amount so forfeited shall be used to reduce the Profit Sharing Contributions or Matching Contributions otherwise made pursuant to Sections 4.1 or 4.4 of the Plan for the Plan Year in which such forfeiture occurs; provided, however, that the Plan shall reinstate and pay to such person or persons the amount of the benefits so forfeited upon a claim for such benefits made by such person or persons. The amount to be so reinstated shall be obtained from the total amount that shall have been forfeited pursuant to this Section 8.9 during the Plan Year that the claim for current forfeited benefit is made, or if such amount is insufficient, from the amounts forfeited pursuant to Sections 4.5(e) and 8.1(c). If the amount to be reinstated exceeds the amount of such forfeitures, then the Employer in respect of whose Employee the claim for forfeited benefits is made shall make a contribution in an amount equal to the remainder of such excess. Any such contribution shall be made without regard to whether or not the limitations set forth in Section 4.6 will be exceeded by such contribution.

    Section 8.10.  Successive Employer.

    (a)  In General.  Notwithstanding the foregoing provisions of this Article 8, distributions of Salary Deferral Contribution Accounts of Participants whose employment with an Employer terminates and who continue employment with a Successive Employer (as hereinafter defined) shall be subject to the provisions set forth in this Section 8.10, unless otherwise permitted under the law and the Plan.

    (b)  Separation from Service or Age 59¹/2.  Such a Participant who has incurred a Separation from Service (as hereinafter defined) or has attained age 59¹/2 as of the date his or her employment with an Employer terminates shall be eligible to receive a distribution of his or her Salary Deferral Contribution Account in accordance with Section 8.5(d).

    (c)  Sale of Assets or Subsidiary.  Such a Participant who has not incurred a Separation from Service (as hereinafter defined) and has not attained age 59¹/2 as of the date his or her employment with an Employer terminates shall be eligible to receive a distribution of his or her Salary Deferral Contribution Account in accordance with Section 8.5(d) only if the following conditions are satisfied:

    (1) the Successive Employer does not maintain the Plan after the Participant's employment terminates, within the meaning of Treasury Regulation § 1.401(k)-1(d)(4);

    (2) the distribution is made in the form of a lump sum distribution (within the meaning of section 402(d)(4) of the Code, without regard to section 402(d)(4)(A)(i) through (iv), (B) and (F) of the Code) by the end of the second calendar year after the calendar year in which the Participant's employment terminated;

    (3) the Successive Employer is not an Affiliate of an Employer;

    (4) the Successive Employer purchases (i) at least 85 percent of the assets used by the Employer in a trade or business of the Employer or (ii) the Employer's interest in a subsidiary (in each case within the meaning of Treasury Regulation § 1.401(k)-1(d)(1));

    (5) both the Employer and the Successive Employer are corporations; and

    (6) the Company determines in its sole discretion that a distribution under this Section 8.10(c) is permissible.

    (d)  Deferral of Distributions.  Such a Participant who is not eligible for a distribution under Section 8.10(b) or (c) may not receive a distribution of his or her Salary Deferral Contribution Account until such Participant has incurred a Separation from Service, attained age 59¹/2 or otherwise become eligible to receive a distribution of such account under section 401(k)(2)(B) of the Code.

27

    (e)  Transfer of Accounts to Successive Employer's Plan.  The Company may determine in its sole and absolute discretion to transfer the accounts of some or all of the Participants who are employed by a Successive Employer to a tax-qualified retirement plan maintained by such Successive Employer.

    (f)  Definitions.  For purposes of this Section, the following terms shall have the meaning set forth below:

          (i)  "Separation from Service" shall mean the date on which a Participant has separated from service with the meaning of section 401(k)(2)(b)(i)(I) of the Code. The determination of whether a Participant has incurred a Separation from Service shall be made by the Committee in its sole and absolute discretion and shall be conclusive and binding on all persons.

          (ii) "Successive Employer" shall mean an entity that either (i) purchases from an Employer some or all of its interest in a trade or business or a business unit or (ii) enters into a contract with an Employer pursuant to which such entity assumes responsibility for the management or operation of a trade or business or a business unit of such Employer.

ARTICLE 9

SPECIAL PARTICIPATION RULES

    Section 9.1.  Change of Employment Status.  If an Employee who is not a Participant becomes eligible to participate because of a change in his or her employment status, then such Employee shall be entitled to become a Participant as soon as administratively practicable following the first Entry Date coincident with or next following the Employee's satisfaction of the eligibility requirements.

    Section 9.2.  Reemployment of an Eligible Employee Whose Employment Terminated Prior to Becoming a Participant.  (a)  If an Eligible Employee whose employment terminated before the Employee had satisfied the requirements of Section 3.1 or 9.1 is reemployed by an Employer, such Employee's prior service shall be disregarded and such Employee shall be eligible to become a Participant in accordance with Section 3.1.

    (b)  If an Eligible Employee whose employment terminated after he or she had satisfied the requirements of Section 3.1 or 9.1 but prior to becoming a Participant is reemployed by an Employer, then he or she shall not be required to satisfy again such requirements and shall be eligible to become a Participant as soon as administratively practicable on the Entry Date coincident with or next following the date of his or her reemployment date.

    Section 9.3.  Reemployment of a Terminated Participant.  (a)  Participation.  If a terminated Participant is reemployed, then he or she shall not be required to satisfy the requirements of Section 3.1, and shall be eligible to participate as of the first Entry Date on or after the date of his or her reemployment date, provided that such rehired Participant shall be eligible to make Salary Deferral Contributions on the first day of the first payroll period occurring after such Entry Date as of which the Plan's recordkeeper has all the documentation it deems necessary to process such contributions.

    (b)  Restoration of Forfeitures.  If a Participant who terminated employment with the Employers is reemployed prior to incurring a Break in Service of five consecutive years and if upon his termination of employment such a Participant received a distribution pursuant to Section 8.4 and a portion of his Profit Sharing Account or Matching Contributions Account was forfeited pursuant to Section 8.1(c), then the Participant shall have the right to repay to the Trustee an amount equal to the amount distributed, provided that the repayment is made on or before the last day of the Plan Year in which the fifth anniversary of the Participant's date of reemployment occurs. An amount so repaid shall be allocated to the Participant's account as soon as administratively practicable after the repayment is received by the Trustee. Regardless of whether a Participant repays the amount equal to his or her

28

previous distribution, an amount equal to the portion forfeited from the Participant's Profit Sharing Account and Matching Contributions Account shall be credited to such account. The source of funds for the formerly forfeited amounts which are so credited in a Plan Year shall be the forfeitures pursuant to Sections 4.5(e) and 8.1(c) for such Plan Year. If the forfeitures pursuant to Sections 4.5(e) and 8.1(c) for any Plan Year are less than the formerly forfeited amounts which are credited in such Plan Year to Participants' accounts pursuant to this Section, then the Company shall direct the Employer of each such Participant to make an additional contribution in an amount determined by the Company so that the amount of such additional contributions and the forfeitures pursuant to Sections 4.5(e) and 8.1(c) are equal to the amounts credited to such Participants' accounts that are attributable to the previously forfeited amounts. Any such additional contribution is not subject to the deduction limitation set forth in Section 4.6.

    (c)  Vesting Service Credit.  For purposes of Section 8.1, if a terminated Participant is reemployed, then he or she shall receive credit for Service earned prior to such termination according to the following rules:

          (i)  if such terminated participant is reemployed prior to incurring a one year Break in Service, he or she shall receive credit for all Service earned prior to such Break in Service;

          (ii) if such terminated participant is reemployed after incurring a one year Break in Service he or she shall receive credit for Service earned prior to such Break in Service, if:

          (A) he or she had a vested interest in any portion of his or her Matching Contributions Account or Profit Sharing Account; or

          (B) the number of consecutive Breaks in Service does not equal or exceed the greater of five (5) years or the number of years of Service he or she had before such Break in Service.

    Section 9.4.  Employment by Related Entities.   If an individual is employed by an Affiliate that is not a participating Employer, then any period of such employment shall be taken into account to the same extent it would have been had such period of employment been as an Employee of his or her Employer solely for the purposes of (i) determining whether and when such individual is eligible to participate in the Plan under Article 3, (ii) measuring such individual's years of Service and (iii) determining when such individual has retired or otherwise terminated his or her employment for purposes of Article 8.

    Section 9.5.  Leased Employees.  If an individual who performed services as a leased employee (within the meaning of section 414(n)(2) of the Code) of an Employer or an Affiliate becomes an Employee, or if an Employee becomes such a leased employee, then any period during which such services were so performed shall be taken into account solely for the purposes of determining whether and when such individual is eligible to participate in the Plan under Article 3, measuring such individual's years of Service and determining when such individual has retired or otherwise terminated his or her employment for purposes of Article 8 to the same extent it would have been had such service been as an Employee. This Section shall not apply to any period of service during which such a leased employee was covered by a plan described in section 414(n)(5) of the Code.

    Section 9.6.  Reemployment of Veterans.  (a)  General.  The provisions of this Section shall apply in the case of the reemployment by an Employer of an Eligible Employee, within the period prescribed by USERRA, after the Employee's completion of a period of Qualified Military Service. The provisions of this Section are intended to provide such Employees with the rights required by USERRA and section 414(u) of the Code, and shall be interpreted in accordance with such intent.

    (b)  Make Up of Salary Deferral Contributions.  Such Employee shall be entitled to make contributions under the Plan ("Make-Up Deferrals"), in addition to any Salary Deferral Contributions

29

which the Employee elects to have made under the Plan pursuant to Section 4.2. From time to time while employed by an Employer, such Employee may elect to make such Make-Up Deferrals during the period beginning on the date of such Employee's reemployment and ending on the earlier of:

(i)

the end of the period equal to the product of three and such Employee's period of Qualified Military Service, and



(ii)

the fifth anniversary of the date of such reemployment.

    Such Employee shall not be permitted to contribute Make-Up Deferrals to the Plan in excess of the amount which the Employee could have elected to have made under the Plan in the form of Salary Deferral Contributions if the Employee had continued in employment with his or her Employer during such period of Qualified Military Service. Such Employee shall be deemed to have earned "Compensation" from his or her Employer during such period of Qualified Military Service for this purpose in the amount prescribed by sections 414(u)(2)(B) and 414(u)(7) of the Code. The manner in which an Eligible Employee may elect to make Make-Up Deferrals pursuant to this subsection (b) shall be prescribed by the 401(k) Administrator.

    (c)  Make-Up of Matching Contributions.  An Eligible Employee who contributes Make-Up Deferrals as described in subsection (b) shall be entitled to an allocation of Matching Contributions ("Make-Up Matching Contributions") in an amount equal to the amount of Matching Contributions which would have been allocated to the Matching Contributions Account of such Eligible Employee under the Plan if such Make-Up Deferrals had been made in the form of Salary Deferral Contributions during the period of such Employee's Qualified Military Service. The amounts necessary to make such allocation of Make-Up Matching Contributions shall be derived from forfeitures not yet applied towards Matching Contributions for the Plan Year in which the Make-Up Deferrals are made, and if such forfeitures are not sufficient for this purpose, then the Eligible Employee's Employer shall make a special contribution which shall be utilized solely for purposes of such allocation.

    (d)  Profit Sharing Contributions.  Such Employee shall be entitled to share in any allocations of Profit Sharing Contributions with respect to such period of Qualified Military Service as an Eligible Employee. Such Employee shall be deemed to have earned "Compensation" from his or her Employer during such period of Qualified Military Service for this purpose in the amount prescribed by sections 414(u)(2)(B) and 414(u)(7) of the Code.

    (e)  Application of Limitations and Nondiscrimination Rules.  Any contributions made by an Eligible Employee or an Employer pursuant to this Section on account of a period of Qualified Military Service in a prior Plan Year shall not be subject to the limitations prescribed by Sections 4.3, 4.6 and 7.5 of the Plan (relating to sections 402(g), 404 and 415 of the Code) for the Plan Year in which such contributions are made. The Plan shall not be treated as failing to satisfy the nondiscrimination rules of Section 4.5 of the Plan (relating to sections 401(k)(3) and 401(m) of the Code) for any Plan Year solely on account of any make up contributions made by an Eligible Employee or an Employer pursuant to this Section.

ARTICLE 10

SHAREHOLDER RIGHTS WITH RESPECT TO COMPANY STOCK

    Section 10.1.  Voting Shares of Company Stock.  Each Participant (or Beneficiary) shall be entitled to give voting instructions, in the time and manner prescribed by the Trustee, with respect to the number of whole shares of Company Stock allocated to his or her accounts. The Trustee shall vote, in person or by proxy, such shares according to the voting instructions of Participants (or Beneficiaries) which have been timely submitted to the Trustee. To the extent permitted by law, the Trustee shall vote the shares of Company Stock credited to Participants' (or Beneficiaries') accounts with respect to which

30

the Trustee does not timely receive voting instructions, shares of Company Stock that are not allocated to Participants' (or Beneficiaries') accounts (if any) and fractional shares in the same proportion by which the Trustee votes shares of Company Stock for which instructions are timely received.

    Written notice of any meeting of shareholders of the Company and a request for voting instructions shall be given by the Trustee, at such time and in such manner as the Trustee shall determine, to each Participant (or Beneficiary) entitled to give instructions for voting shares of Company Stock at such meeting. The Company shall establish a means by which such voting instructions can expeditiously be delivered to the Trustee. All such instructions shall be confidential and shall not be disclosed to any person, including any Employer.

    Section 10.2.  Tender Offers.  (a)  Rights of Participants.  In the event a tender offer is made generally to the shareholders of the Company to transfer all or a portion of their shares of Company Stock in return for valuable consideration, including, but not limited to, offers regulated by section 14(d) of the Securities Exchange Act of 1934, as amended, the Trustee shall respond to such tender offer in respect of shares of Company Stock held by the Trustee in the Company Stock Fund in accordance with instructions obtained from Participants (or Beneficiaries). Each Participant (or Beneficiary) shall be entitled to instruct the Trustee regarding how to respond to any such tender offer with respect to the number of shares of Company Stock then allocated to his or her accounts. Each Participant (or Beneficiary) who does not provide timely instructions to the Trustee shall be presumed to have directed the Trustee not to tender shares of Company Stock allocated to his or her accounts. A Participant (or Beneficiary) shall not be limited in the number of instructions to tender or withdraw from tender which he or she can give, but a Participant (or Beneficiary) shall not have the right to give instructions to tender or withdraw from tender after a reasonable time established by the Trustee pursuant to paragraph (c) below.

    (b)  Duties of the Company.  Within a reasonable time after the commencement of a tender offer, the Company shall cause the Trustee to provide to each Participant or Beneficiary, as the case may be:

(i)

the offer to purchase as distributed by the offeror to the shareholders of the Company,



(ii)

a statement of the number of shares of Company Stock allocated to his or her account, and



(iii)

directions as to the means by which instructions with respect to the tender offer can be given.

    The Company shall establish and pay for a means by which instructions with respect to a tender offer can expeditiously be delivered to the Trustee. All such instructions shall be confidential and shall not be disclosed to any person, including any Employer. The Company at its election may engage an agent to receive such instructions and transmit them to the Trustee.

    For purposes of allocating the proceeds of any sale or exchange pursuant to a tender offer, the Trustee shall then treat as having been sold or exchanged from each of the individual accounts of Participants (and Beneficiaries) who provided timely directions to the Trustee under this Section that number of shares of Company Stock subject to such directions and the proceeds of such sale or exchange shall be allocated accordingly. Any proceeds from the sale or exchange of shares of Company Stock shall be invested in a commingled fund maintained by the Trustee designated to hold such amounts pending investment instructions from Participants (and Beneficiaries).

    (c)  Duties of the Trustee.  The Trustee shall follow the instructions of the Participants (and Beneficiaries) with respect to the tender offer as transmitted to the Trustee. The Trustee may establish a reasonable time, taking into account the time restrictions of the tender offer, after which it shall not accept instructions of Participants (or Beneficiaries).

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ARTICLE 11

ADMINISTRATION

    Section 11.1.  The Committee.  (a)  Either (i) the Compensation and Stock Option Committee or (ii) the Chairman of the Board of Directors or the President of the Company, to the extent authorized by the Compensation and Stock Option Committee, shall appoint a Committee consisting of three or more members that shall be the "administrator" of the Plan within the meaning of such term as used in ERISA. The Committee shall be a "named fiduciary" within the meaning of such term as used in ERISA. The Compensation and Stock Option Committee or an authorized officer shall have the right at any time, with or without cause, to remove one or more members of the Committee. In addition, any member of the Committee may resign and such resignation shall be effective upon delivery of the written resignation to the Company. Notwithstanding anything contained in this Section 11.1, an Employee of the Company who serves on the Committee shall be deemed to resign upon the termination of such Employee's employment with the Company. Such deemed resignation shall be effective as of the date of the termination of employment. Upon the resignation, removal or failure or inability for any reason of any member of the Committee to act hereunder, the Compensation and Stock Option Committee or an authorized officer shall appoint a successor. Any successor members of the Committee shall have all the rights, privileges and duties of the predecessor, but shall not be held accountable for the acts of the predecessor.

    (b) Any member of the Committee may, but need not, be an employee, director, officer or shareholder of an Employer and such status shall not disqualify him or her from taking any action hereunder or render him or her accountable for any distribution or other material advantage received by him or her under the Plan, provided that no member of the Committee who is a Participant shall take part in any action of the Committee or any matter involving solely his or her rights under the Plan.

    (c) Promptly after the appointment of the members of the Committee and from time to time thereafter, and promptly after the appointment of any successor member of the Committee, the Trustee shall be notified as to the names of the persons appointed as successor members of the Committee by delivery to the Trustee of a written notice of such appointment.

    (d) The Committee shall have the duty and authority to interpret and construe, in its sole discretion, the terms of the Plan in regard to all questions of eligibility, the status and rights of Participants, distributees and other persons under the Plan, and the manner, time, and amount of payment of any distribution under the Plan. Each Employer shall, from time to time, upon request of the Committee, furnish to the Committee such data and information as the Committee shall require in the performance of its duties. All determinations and actions of the Committee shall be conclusive and binding upon all affected parties, except that the Committee may revoke or modify a determination or action that it determines to have been in error.

    (e) The Committee or the 401(k) Administrator shall direct the Trustee to make payments of amounts to be distributed from the Trust under Article 8.

    (f) The Committee may allocate its responsibilities among its members and may designate any other person, partnership, corporation or another committee to carry out any of its responsibilities with respect to administration of the Plan. Any such allocation or designation shall be reduced to writing and such writing shall be kept with the records of the Plan. Any reference in the Plan to the Committee shall include any person, partnership, corporation or committee to which the Committee has delegated any of its responsibilities.

    (g) The Committee may act at a meeting, or by writing without a meeting, by the vote or written assent of a majority of its members. The Compensation and Stock Option Committee shall designate

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one member of the Committee as its chairman, and the chairman of the Committee shall appoint one member of the Committee as its secretary. The Committee shall keep the Trustee advised of the identity of the members holding such offices. The Committee, as Plan Administrator, shall be the Plan's agent for service of legal process and shall be authorized to forward all necessary communications to the Trustee. The secretary of the Committee shall keep records of all meetings of the Committee. The Committee may adopt such rules and procedures as it deems desirable for the conduct of its affairs and the administration of the Plan, provided that any such rules and procedures shall be consistent with the provisions of the Plan and ERISA.

    (h) The members of the Committee shall discharge their duties with respect to the Plan (i) solely in the interest of the Participants and Beneficiaries, (ii) for the exclusive purpose of providing benefits to Employees participating in the Plan and their Beneficiaries and of defraying reasonable expenses of administering the Plan and (iii) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. The Employers hereby jointly and severally indemnify the members of the Committee from the effects and consequences of their acts, omissions and conduct in their official capacity, except to the extent that such effects and consequences result from their own willful misconduct.

    (i) The members of the Committee may not receive any compensation or fee for services as members of the Committee. The Employer shall reimburse the members of the Committee for any necessary expenditures incurred in the discharge of their duties as members of the Committee.

    (j) The Committee may employ such counsel (who may be counsel for an Employer) and agents and may arrange for such clerical and other services as it may require in carrying out the provisions of the Plan.

    Section 11.2.   Claims Procedure.  Any Participant or distributee who believes he or she is entitled to benefits in an amount greater than those which he or she is receiving or has received may file a claim with the Committee. Such a claim shall be in writing and state the nature of the claim, the facts supporting the claim, the amount claimed, and the address of the claimant. The Committee shall review the claim and, unless special circumstances require an extension of time, within 90 days after receipt of the claim, give written notice by registered or certified mail to the claimant of its decision with respect to the claim. If special circumstances require an extension of time, the claimant shall be so advised in writing within the initial 90-day period and in no event shall such an extension exceed 90 days. The notice of the decision of the Committee with respect to the claim shall be written in a manner calculated to be understood by the claimant and, if the claim is wholly or partially denied, set forth the specific reasons for the denial, specific references to the pertinent Plan provisions on which the denial is based, a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary, and an explanation of the claim review procedure under the Plan. The Committee shall also advise the claimant that the claimant or his or her duly authorized representative may request a review by the Committee of the denial by filing with the Committee within 60 days after notice of the denial has been received by claimant, a written request for such review. The claimant shall be informed that he or she may have reasonable access to pertinent documents and submit comments in writing to the Committee within the same 60-day period. If a request is so filed, review of the denial shall be made by the Committee within, unless special circumstances require an extension of time, 60 days after receipt of such request, and the claimant shall be given written notice of the Committee's final decision. If special circumstances require an extension of time, the claimant shall be so advised in writing within the initial 60-day period and in no event shall such an extension exceed 60 days. The notice of the Committee's final decision shall include specific reasons for the decision and specific references to the pertinent Plan provisions on which the decision is based and shall be written in a manner calculated to be understood by the claimant.

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    Section 11.3.  Notices to Participants.  All notices, reports and statements given, made, delivered or transmitted to a Participant or distributee or any other person entitled to or claiming benefits under the Plan shall be deemed to have been duly given, made or transmitted when mailed by first class mail with postage prepaid and addressed to the Participant or distributee or such other person at the address last appearing on the records of the Committee. A Participant or distributee or other person may record any change of his or her address from time to time by written notice filed with the 401(k) Administrator.

    Section 11.4.  Notices.  Written directions, notices and other communications from Participants or distributees or any other person entitled to or claiming benefits under the Plan to the Committee or the 401(k) Administrator shall be deemed to have been duly given, made or transmitted either when delivered to such location as shall be specified upon the forms prescribed by the Committee or the 401(k) Administrator for the giving of such directions, notices and other communications or when mailed by first class mail with postage prepaid and addressed to the addressee at the address specified upon such forms.

    Section 11.5.  Records.  The Committee shall keep a record of all of its proceedings with respect to the Plan and shall keep or cause to be kept all books of account, records and other data as may be necessary or advisable in the Committee's judgment for the administration of the Plan.

    Section 11.6.  Reports of Trustee and Accounting to Participants.  The Committee shall keep on file, in such form as it shall deem convenient and proper, all reports concerning the Trust Fund received by it from the Trustee, and the Committee shall, as soon as possible after the close of each Plan Year, advise each Participant and Beneficiary of the balance credited to any account for his or her benefit as of the close of such Plan Year pursuant to Article 7 hereof.

ARTICLE 12

PARTICIPATION BY OTHER EMPLOYERS

    Section 12.1.  Adoption of Plan.  With the consent of the Company, any entity may become a participating Employer under the Plan by (a) taking such action as shall be necessary to adopt the Plan and (b) executing and delivering such instruments and taking such other action as may be necessary or desirable to put the Plan into effect with respect to such entity. However, the sole, exclusive right of any other amendment of whatever kind or extent to the Plan or Trust is reserved by the Company. The administrative powers and control of the Company, as provided in the Plan and Trust agreement, including the sole right of amendment, and of appointment and removal of the Trustee and its successors, shall not be diminished by reason of the participation of any such adopting entity in the Plan.

    Section 12.2.  Withdrawal from Participation.  Any Employer may withdraw from participation in the Plan at any time by filing with the Company a duly certified copy of a written instrument duly adopted by the Employer to that effect and giving notice of its intended withdrawal to the Company, the other Employers and the Trustee prior to the effective date of withdrawal. Any Employer, by action of its board of directors or other governing authority, may withdraw from the Plan and Trust after giving 90 days' notice to the Board of Directors, provided the Board of Directors consents to such withdrawal. Distribution may be implemented through continuation of the Trust, or transfer to another trust fund exempt from tax under section 501(a) of the Code, or to a group annuity contract qualified under section 401(a) of the Code, or distribution may be made as an immediate cash payment in accordance with the directions of the Company; provided, however, that no such action shall divert any part of such fund to any purpose other than the exclusive benefit of the Employees of such Employer.

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    Section 12.3.  Continuance by a Successor.  In the event that an Employer is reorganized by way of merger, consolidation, transfer of assets or otherwise, so that another entity succeeds to all or substantially all of the Employer's business, such successor entity may be substituted for the Employer under the Plan by adopting the Plan, with the written consent of the Board of Directors. Contributions by the Employer shall be automatically suspended from the effective date of any such reorganization until the date upon which the substitution of such successor entity for the Employer under the Plan becomes effective. If, within 90 days following the effective date of any such reorganization, such successor entity shall not have elected to become a party to the Plan, the Board of Directors does not consent to the adoption of the Plan by such successor entity or the Employer adopts a plan of complete liquidation other than in connection with a reorganization, the Plan shall be automatically terminated with respect to employees of such Employer as of the close of business on the 90th day following the effective date of such reorganization or as of the close of business on the date of adoption of such plan of complete liquidation, as the case may be, and the Company shall direct the Trustee to distribute the portion of the Trust Fund applicable to such Employer in the manner provided in Article 15.

    If such successor entity is substituted for an Employer, by electing to become a party to the Plan as described above, then, for all purposes of the Plan, employment of such Employee with such Employer, including service with and compensation paid by such Employer, shall be considered to be employment with such Employer.

    Section 12.4.  Company as Agent for Employers.  Each entity that becomes a participating Employer pursuant to Section 12.1 or 12.3 by so doing shall be deemed to have appointed the Company its agent to exercise on its behalf all of the powers and authorities hereby conferred upon the Company by the terms of the Plan, including, but not by way of limitation, the power to amend and terminate the Plan and shall be deemed to have consented to (i) any delegation by the Company of any of its powers, duties or responsibilities to another person and (ii) the designation of the 401(k) Administrator to perform the duties set forth herein. The authority of the Company to act as such agent shall continue unless and until the portion of the Trust Fund held for the benefit of Employees of the particular Employer and their Beneficiaries is set aside in a separate Trust Fund as provided in Section 15.2.

ARTICLE 13

MISCELLANEOUS

    Section 13.1.  Expenses.  All costs and expenses incurred in administering the Plan and the Trust, including the expenses of the Company, the Committee and the 401(k) Administrator, the fees of counsel and any agents for the Company and the Committee, the fees and expenses of the Trustee, the fees of counsel for the Trustee and other administrative expenses shall be paid under the direction of the Committee from the Trust Fund to the extent such expenses are not paid by the Employers. The Committee, in its sole discretion, having regard to the nature of a particular expense, shall determine the portion of such expense that is to be borne by each Employer.

    Section 13.2.  Non-Assignability.  (a)  In General.  It is a condition of the Plan, and all rights of each Participant and Beneficiary shall be subject thereto, that no right or interest of any Participant or Beneficiary in the Plan shall be assignable or transferable in whole or in part, either directly or by operation of law or otherwise, including, but not by way of limitation, execution, levy, garnishment, attachment, pledge or bankruptcy, but excluding devolution by death or mental incompetency, and no right or interest of any Participant or Beneficiary in the Plan shall be liable for, or subject to, any obligation or liability of such Participant or Beneficiary, including claims of a Life Partner and claims for alimony or the support of any spouse except as provided below.

35

    (b)  Exception for Qualified Domestic Relations Orders.  Notwithstanding any provision of the Plan to the contrary, if a Participant's account balance under the Plan, or any portion thereof, is the subject of one or more qualified domestic relations orders, as defined below, such account balance or portion thereof shall be paid to the person at the time and in the manner specified in any such order. For purposes of this subsection (b), the term "qualified domestic relations order" shall have the meaning prescribed by section 414(p) of the Code. The Committee, in its sole discretion, shall determine whether any order constitutes a "qualified domestic relations order" under this subsection. A domestic relations order shall not fail to constitute a "qualified domestic relations order" under this subsection (b) solely because such order provides for immediate payment to an alternate payee of the portion of the Participant's accounts assigned to the alternate payee under the terms of such order.

    (c)  Other Exception.  Notwithstanding any provision of the Plan to the contrary, if a Participant is ordered or required to pay an amount to the Plan pursuant to (i) a judgment of conviction for a crime involving the Plan, (ii) a civil judgment in connection with a violation (or alleged violation) of Part 4 of Subtitle B of Title I of ERISA or (iii) a settlement agreement between the Secretary of Labor and the Participant or the Pension Benefit Guaranty Corporation and the Participant in connection with a violation (or an alleged violation) of Part 4 of Subtitle B of Title I of ERISA, such amount may, to the extent permitted by law, be offset against such Participant's benefits under the Plan.

    Section 13.3.  Employment Non-Contractual.  The Plan confers no right upon an Employee to continue in employment.

    Section 13.4.  Limitation of Rights.  The Employers do not guarantee or promise to pay or to cause to be paid any of the benefits provided by the Plan. A Participant or distributee shall have no right, title or claim in or to any specific asset of the Trust Fund, but shall have the right only to distributions from the Trust Fund on the terms and conditions herein provided.

    Section 13.5.  Merger or Consolidation with Another Plan.  A merger or consolidation with, or transfer of assets or liabilities to, any other plan shall not be effected unless the terms of such merger, consolidation or transfer are such that each Participant, distributee, Beneficiary or other person entitled to receive benefits from the Plan would, if the Plan were to terminate immediately after the merger, consolidation or transfer, receive a benefit equal to or greater than the benefit such person would be entitled to receive if the Plan were to terminate immediately before the merger, consolidation, or transfer.

    Section 13.6.  Gender and Plurals.  Wherever used in the Plan, references exclusively to one gender are intended to include the masculine and feminine genders, and, unless the context otherwise requires, words in the singular shall include the plural, and words in the plural shall include the singular.

    Section 13.7.  Applicable Law.  The Plan and all rights hereunder shall be governed by and construed in accordance with the laws of the State of Delaware to the extent such laws have not been preempted by applicable federal law.

    Section 13.8.  Severability.  If a provision of the Plan shall be held illegal or invalid, the illegality or invalidity shall not affect the remaining parts of the Plan and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included in the Plan.

    Section 13.9.  No Guarantee.  None of the Company, the Employers, the Committee or the Trustee in any way guarantees the Trust from loss or depreciation nor the payment of any money that may be or become due to any person from the Trust Fund. Nothing herein contained shall be deemed to give any Participant, distributee, or Beneficiary an interest in any specific part of the Trust Fund or any other interest except the right to receive benefits out of the Trust Fund in accordance with the provisions of the Plan and the Trust Fund.

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    Section 13.10.  Plan Voluntary.  Although it is intended that the Plan shall be continued and that contributions shall be made as herein provided, the Plan is entirely voluntary on the part of the Employers and the continuance of the Plan and the payment of contributions hereunder are not to be regarded as contractual obligations of the Employers.

    Section 13.11.  Tax Withholding.  The Employer shall have the right to require, prior to any distribution, payment by the Participant of any Federal, state, local or other taxes which may be required to be withheld or paid in connection with any distribution hereunder. The Employer shall have the right to withhold from a distribution, which would otherwise be distributable to a Participant, any amount necessary to satisfy any such obligation.

ARTICLE 14

TOP-HEAVY PLAN REQUIREMENTS

    Section 14.1.  Top-Heavy Plan Determination.  If as of the determination date (as hereinafter defined) for any Plan Year (a) the sum of the account balances under the Plan and all other defined contribution plans in the aggregation group (as defined below) and (b) the present value of accrued benefits under all defined benefit plans in such aggregation group of all Participants in such plans who are key employees (as hereinafter defined) for such Plan Year exceeds 60 percent (60%) of the aggregate of the account balances and present value of accrued benefits of all Participants in such plans as of the determination date (as hereinafter defined), then the Plan shall be a "top-heavy plan" for such Plan Year, and the requirements of Sections 14.3 and 14.4 shall be applicable for such Plan Year as of the first day thereof. If the Plan is a top-heavy plan for any Plan Year and is not a top-heavy plan for any subsequent Plan Year, the requirements of this Article 14 shall not be applicable for such subsequent Plan Year.

    Section 14.2.  Definitions and Special Rules.  (a)  Definitions.  For purposes of this Article 14, the following definitions shall apply:

    (1) Determination Date.  The determination date for all plans in the aggregation group shall be the last day of the preceding Plan Year, and the valuation date applicable to a determination date shall be (i) in the case of a defined contribution plan, the date as of which account balances are determined that is coinciding with or immediately precedes the determination date, and (ii) in the case of a defined benefit plan, the date as of which the most recent actuarial valuation for the Plan Year that includes the determination date is prepared, except that if any such plan specifies a different determination or valuation date, such different date shall be used with respect to such plan.

    (2) Aggregation Group.  The aggregation group shall consist of (a) each plan of an Employer in which a key employee is a Participant, (b) each other plan that enables such a plan to be qualified under section 401(a) of the Code, and (c) any other plans of an Employer that the Company designates as part of the aggregation group.

(3)

Key Employee.  Key employee shall have the meaning set forth in section 416(i) of the Code.



(4)

Compensation.  Compensation shall have the meaning set forth in U.S. Treasury Regulation §1.415-2(d).

    (b)  Special Rules.  For the purpose of determining the accrued benefit or account balance of a Participant, the accrued benefit or account balance of any person who has not performed services for an employer at any time during the 5-year period ending on the determination date shall not be taken into account pursuant to this Section, and any person who received a distribution from a plan (including a plan that has terminated) in the aggregation group during the 5-year period ending on the last day of the preceding Plan Year shall be treated as a Participant in such plan, and any such

37

distribution shall be included in such Participant's account balance or accrued benefit, as the case may be.

    Section 14.3.  Minimum Contribution for Top-Heavy Years.  Notwithstanding any provision of the Plan to the contrary, the sum of the Employer contributions made pursuant to Article 4 allocated during any Plan Year to the accounts of each Participant (other than a key employee) for which the Plan is a top-heavy plan shall in no event be less than the lesser of (i) 3 percent (3%) of such Participant's compensation during such Plan Year and (ii) the highest percentage at which contributions are made on behalf of any key employee for such Plan Year. If during any Plan Year for which this Section 14.3 is applicable a defined benefit plan is included in the aggregation group and such defined benefit plan is a top-heavy plan for such Plan Year, the percentage set forth in clause (i) of the first sentence of this Section shall be 5 percent (5%). The percentage referred to in clause (ii) of the first sentence of this Section shall be obtained by dividing the aggregate of contributions made pursuant to Article 4 and pursuant to any other defined contribution plan that is required to be included in the aggregation group (other than a defined contribution plan that enables a defined benefit plan that is required to be included in such group to be qualified under section 401(a) of the Code) during the Plan Year on behalf of such key employee by such key employee's compensation for the Plan Year.

    Section 14.4.  Special Rules for Applying Statutory Limitations on Benefits.  The provisions of this Section shall apply only with respect to Plan Years commencing prior to January 1, 2000.

    (a)  In any Plan Year for which the Plan is a top-heavy plan, clause (2)(A)(II) of Section 7.5 shall be applied by substituting "100 percent (100%)" for "125 percent (125%)" appearing therein unless for any such Plan Year (i) the percentage of account balances of Participants who are key employees does not exceed 90 percent (90%) and (ii) employer contributions and forfeitures allocated to the accounts of Participants who are not key employees equals at least 4 percent (4%) of the compensation (within the meaning of section 415 of the Code) of each such Participant.

    (b)  In any Plan Year for which the Plan is a top-heavy plan, clause (2)(B)(I) of Section 7.5 shall be applied by substituting "100 percent (100%)" for "125 percent (125%)" appearing therein unless for any such Plan Year (i) the percentage of accrued benefits of Participants who are key employees does not exceed 90 percent (90%) and (ii) the minimum accrued benefit of each Participant under all defined benefit plans in the aggregate group is at least 3 percent (3%) of his or her average compensation (determined under section 416 of the Code) multiplied by each year of Service after 1983, not in excess of 10, for which such plans are top-heavy plans.

ARTICLE 15

AMENDMENT, ESTABLISHMENT OF SEPARATE
PLAN AND TERMINATION

    Section 15.1.  Amendment.  The Company shall have the right to amend the Plan at any time, and from time to time, by resolution of the Board of Directors. Any such amendment shall become effective as of the date the Board of Directors shall determine and may apply to Participants in the Plan at the time thereof as well as to future Participants.

    Section 15.2.  Establishment of Separate Plan.  If an Employer withdraws from the Plan under Section 12.2, then the Committee shall determine, in the manner hereinafter described, the portion of each of the funds of the Trust Fund which is allocable to the Participants (and Beneficiaries) of such Employer and direct the Trustee to segregate such portions in a separate trust. Such separate trust shall thereafter be held and administered as a part of the separate plan of such Employer.

    The portion of a fund in the Trust Fund applicable to the Participants (and Beneficiaries) of a particular Employer shall be an amount which bears the same ratio to the value of such fund as the

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total value of the fund accounts of Participants employed or formerly employed by such Employer bears to the total value of the fund accounts of all Participants and former Participants.

    Section 15.3.  Termination.  The Company shall have the right to terminate the Plan at any time by resolution of its Board of Directors. Any Employer may at any time terminate its participation in the Plan by resolution of its board of directors to that effect. In the event of any such termination, or in the event of a partial termination of the Plan with respect to a group of Participants, the accounts which are applicable to the Participants with respect to whom the Plan is terminated shall become fully vested and shall not thereafter be subject to forfeiture. In the event that an Employer terminates its participation in the Plan, the Committee shall determine, in the manner provided in Section 15.2, the portion of the Trust Fund held by the Trustee which is applicable to the Participants (and Beneficiaries) of such Employer and direct the Trustee to distribute such portion to Participants (and Beneficiaries) in proportion to the balances of their respective accounts. A permanent suspension of contributions by an Employer shall be deemed a termination of such Employer's participation in the Plan for purposes of this Section. A complete discontinuance of contributions by an Employer shall be deemed a termination of such Employer's participation in the Plan for purposes of this Section.

    If the Internal Revenue Service shall refuse with respect to any Employer to issue an initial favorable determination letter that the Plan and Trust as adopted by such Employer meet the requirements of section 401(a) of the Code and that the Trust is exempt from tax under section 501(a) of the Code, such Employer may terminate its participation in the Plan and the Company shall direct the Trustee to pay and deliver the portion of the Trust Fund applicable to the Participants and former Participants of such Employer, determined in the manner provided in Section 15.2, to such Employer and such Employer shall pay to Participants or their Beneficiaries the part of such Employer's portion of the Trust Fund which is attributable to contributions made by Participants.

    Section 15.4.  Trust Fund to Be Applied Exclusively for Participants and Their Beneficiaries.  Subject only to the provisions of Sections 4.6, 7.5 and 15.3, and any other provision of the Plan to the contrary notwithstanding, it shall be impossible for any part of the Trust Fund to be used for or diverted to any purpose not for the exclusive benefit of Participants and their beneficiaries either by operation or termination of the Plan, power of amendment or other means.

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HEALTH NET, INC. 401(k) SAVINGS PLAN
HEALTH NET, INC. 401(k) SAVINGS PLAN
TABLE OF CONTENTS
ARTICLE 1 TITLE AND PURPOSE
ARTICLE 2 DEFINITIONS
ARTICLE 3 PARTICIPATION
ARTICLE 4 EMPLOYER CONTRIBUTIONS
ARTICLE 5 ROLLOVER CONTRIBUTIONS
ARTICLE 6 TRUST AND INVESTMENT FUNDS
ARTICLE 7 PARTICIPANT ACCOUNTS
ARTICLE 8 WITHDRAWALS, LOANS AND DISTRIBUTIONS
ARTICLE 9 SPECIAL PARTICIPATION RULES
ARTICLE 10 SHAREHOLDER RIGHTS WITH RESPECT TO COMPANY STOCK
ARTICLE 11 ADMINISTRATION
ARTICLE 12 PARTICIPATION BY OTHER EMPLOYERS
ARTICLE 13 MISCELLANEOUS
ARTICLE 14 TOP-HEAVY PLAN REQUIREMENTS
ARTICLE 15 AMENDMENT, ESTABLISHMENT OF SEPARATE PLAN AND TERMINATION

EX-13.1

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EXHIBIT 13.1

    [The following portions of the Health Net, Inc. 2000 Annual Report to Stockholders are incorporated by reference into the Health Net, Inc. Annual Report on Form 10-K for the year ended December 31, 2000]

    [Certain statements in this report are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties and actual results may differ materially from those results expressed or implied by such "forward-looking statements." For more information, please refer to the "Cautionary Statements," "Additional Information Concerning the Company's Business" and "Risk Factors" sections of the Company's various filings with the Securities and Exchange Commission and the respective documents incorporated by reference therein.]

FINANCIAL HIGHLIGHTS
HEALTH NET, INC.

			Year ended December 31,
(Amounts in thousands, except per share data)			2000		1999(3)			1998(3)			1997(3)			1996(3)
STATEMENT OF OPERATIONS DATA(2):
REVENUES
	Health plan services premiums		$	7,351,098	$	7,031,055		$	7,124,161		$	5,482,893		$	5,395,125
	Government contracts/Specialty services			1,623,158		1,529,855			1,411,267			1,408,402			1,225,723
	Investment and other income			102,299		86,977			93,441			114,300			88,392
		Total revenues		9,076,555		8,647,887			8,628,869			7,005,595			6,709,240
EXPENSES
	Health plan services			6,242,282		5,950,002			6,090,472			4,470,816			4,606,574
	Government contracts/Specialty services			1,080,407		1,002,893			924,075			990,576			995,820
	Selling, general and administrative			1,296,881		1,301,743			1,413,771			1,185,018			868,196
	Depreciation and amortization			105,899		112,041			128,093			98,353			112,916
	Interest			87,930		83,808			92,159			63,555			45,372
	Asset impairment, merger, restructuring and other costs			—		11,724			240,053			286,525			27,408
	Net loss (gain) on sale of businesses and properties			409		(58,332	)		(5,600	)		—			—
		Total expenses		8,813,808		8,403,879			8,883,023			7,094,843			6,656,286
Income (loss) from continuing operations before income taxes				262,747		244,008			(254,154	)		(89,248	)		52,954
Income tax provision (benefit)				99,124		96,226			(88,996	)		(21,418	)		14,124
Income (loss) from continuing operations				163,623		147,782			(165,158	)		(67,830	)		38,830
Discontinued operations(2):
	Income (loss) from discontinued operations, net of tax			—		—			—			(30,409	)		25,084
	Gain (loss) on disposition, net of tax			—		—			—			(88,845	)		20,317
Income (loss) before cumulative effect of change in accounting principle				163,623		147,782			(165,158	)		(187,084	)		84,231
Cumulative effect of a change in accounting principle, net of tax				—		(5,417	)		—			—			—
Net income (loss)			$	163,623	$	142,365		$	(165,158	)	$	(187,084	)	$	84,231
Basic earnings (loss) per share:
Continuing operations			$	1.34	$	1.21		$	(1.35	)	$	(0.55	)		0.31
Income (loss) from discontinued operations, net of tax				—		—			—			(0.25	)		0.20
Gain (loss) on disposition, net of tax				—		—			—			(0.72	)		0.16
Cumulative effect of a change in accounting principle				—		(0.05	)		—			—			—
Net			$	1.34	$	1.16		$	(1.35	)	$	(1.52	)	$	0.67
Diluted earnings (loss) per share:
Continuing operations			$	1.33	$	1.21		$	(1.35	)	$	(0.55	)	$	0.31
Income (loss) from discontinued operations, net of tax				—		—			—			(0.25	)		0.20
Gain (loss) on disposition, net of tax				—		—			—			(0.72	)		0.16
Cumulative effect of a change in accounting principle				—		(0.05	)		—			—			—
Net			$	1.33	$	1.16		$	(1.35	)	$	(1.52	)	$	0.67
Weighted average shares outstanding:
Basic				122,471		122,289			121,974			123,333			124,453
Diluted				123,453		122,343			121,974			123,333			124,966
BALANCE SHEET DATA:
Cash and cash equivalents and investments available for sale			$	1,533,637	$	1,467,142		$	1,288,947		$	1,112,361		$	1,122,916
Total assets				3,670,116		3,696,481			3,863,269			4,076,350			3,423,776
Notes payable and capital leases—noncurrent				766,450		1,039,352			1,254,278			1,308,979			791,618
Stockholders' equity(1)				1,061,131		891,199			744,042			895,974			1,183,411
OPERATING CASH FLOW			$	366,163	$	297,128		$	100,867		$	(125,872	)	$	(6,666	)

(1)

No cash dividends were declared in each of the years presented.

(2)

See Note 3 to the Consolidated Financial Statements for discussion of dispositions during 1999 impacting the comparability of information. The Company purchased four health plans and one insurance company during 1997 which also impacts the comparability of information. Additionally, the Company's workers' compensation segment sold in 1998 and physician practice management segment sold in 1996 have been accounted for as discontinued operations.

(3)

Certain reclassifications have been made to 1999, 1998 and 1997 statements of operations data to conform to the 2000 presentation. Comparable information for 1996 reclassifications is not available.

2

MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The following table sets forth the high and low sales prices of the Company's Class A Common Stock, par value $.001 per share (the "Class A Common Stock"), on the New York Stock Exchange, Inc. ("NYSE") since January 4, 1999.

		High	Low
Calendar Quarter—1999
	First Quarter	127/16	711/16
	Second Quarter	201/16	1013/16
	Third Quarter	1615/16	87/8
	Fourth Quarter	101/2	61/4
Calendar Quarter—2000
	First Quarter	1111/16	75/8
	Second Quarter	1411/16	711/16
	Third Quarter	189/16	131/4
	Fourth Quarter	2615/16	159/16
Calendar Quarter—2001
	First Quarter (through March 7, 2001)	263/16	18

    On March 7, 2001, the last reported sales price per share of the Class A Common Stock was $21.08 per share.

DIVIDENDS

No dividends have been paid by the Company during the preceding two fiscal years. The Company has no present intention of paying any dividends on its Common Stock.

    The Company is a holding company and, therefore, its ability to pay dividends depends on distributions received from its subsidiaries, which are subject to regulatory net worth requirements and certain additional state regulations which may restrict the declaration of dividends by HMOs, insurance companies and licensed managed health care plans. The payment of any dividend is at the discretion of the Company's Board of Directors and depends upon the Company's earnings, financial position, capital requirements and such other factors as the Company's Board of Directors deems relevant.

    Under the Credit Agreement entered into on July 8, 1997 with Bank of America as agent, the Company cannot declare or pay cash dividends to its stockholders or purchase, redeem or otherwise acquire shares of its capital stock or warrants, rights or options to acquire such shares for cash except to the extent permitted under such Credit Agreement as described in the Company's Annual Report on Form 10-K.

HOLDERS

As of March 7, 2001, there were approximately 1,700 holders of record of Class A Common Stock.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Health Net, Inc. (formerly named 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"), point of service ("POS") and preferred provider organization ("PPO") plans; government sponsored managed care plans; and managed care products

3

related to administration and cost containment, behavioral health, dental, vision and pharmaceutical products and other services.

    The Company currently operates within two segments: Health Plan Services and Government Contracts/Specialty Services. The Health Plan Services segment consists of two regional divisions: Western Division (Arizona, California and Oregon) and Eastern Division (Connecticut, Florida, New Jersey, New York and Pennsylvania). 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)



•

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 its two current regional divisions.

    In 2000, the Company decided to exit the Ohio, West Virginia and Western Pennsylvania markets and provided notice of its intention to withdraw from these service areas to the appropriate regulators. As of February, 2001, the Company no longer had any members in such markets.

    In January 2001, the Company entered into a definitive agreement to sell its Florida health plan, Foundation Health, a Florida Health Plan, Inc., to Florida Health Plan Holdings II, LLC for $48 million consisting of $23 million in cash and $25 million in a secured five-year note bearing 8% interest. At December 31, 2000, the Florida health plan had total membership of approximately 169,700 members. The sale transaction is expected to close by June 30, 2001, subject to regulatory approvals and other customary conditions of closing.

    The Company is one of the largest managed health care companies in the United States, with about 4.0 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 PPO, POS and indemnity products, as well as certain auxiliary non-health products such as life and accidental death and disability insurance in 35 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 administration 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. The Company has three TRICARE contracts that cover Alaska, Arkansas, California, Hawaii, Oklahoma, Oregon, Washington and parts of Arizona, Idaho, Louisiana and Texas. Through this segment, the Company also 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 2000 Annual Report to Stockholders and the Company's Annual Report on Form 10-K for the year ended December 31, 2000 ("Form 10-K") contain "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

4

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 and other sections included in the Company's Form 10-K and within the Company's filings with the Securities and Exchange Commission ("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. Except as required by law, the Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof.

RESULTS OF OPERATIONS

CONSOLIDATED OPERATING RESULTS

The Company's net income for the year ended December 31, 2000 was $163.6 million, or $1.33 per diluted share, compared to net income for the same period in 1999 of $142.4 million, or $1.16 per diluted share. The Company's net loss for the year ended December 31, 1998 was $165.2 million, or $1.35 per diluted share.

    The table below and the discussion that follows summarize the Company's performance in the last three fiscal years. Certain 1999 and 1998 amounts have been reclassified to conform to the 2000 presentation. These reclassifications did not affect net income or loss or earnings or losses per share.

			Year Ended December 31,
(Amounts in thousands, except per member per month data)			2000			1999			1998
Revenues:
	Health plan services premiums		$	7,351,098		$	7,031,055		$	7,124,161
	Government contracts/Specialty services			1,623,158			1,529,855			1,411,267
	Investment and other income			102,299			86,977			93,441
		Total revenues		9,076,555			8,647,887			8,628,869
Expenses:
	Health plan services			6,242,282			5,950,002			6,090,472
	Government contracts/Specialty services			1,080,407			1,002,893			924,075
	Selling, general and administrative			1,296,881			1,301,743			1,413,771
	Depreciation			67,260			70,010			78,951
	Amortization			38,639			42,031			49,142
	Interest			87,930			83,808			92,159
	Asset impairment, merger, restructuring and other costs			—			11,724			240,053
	Net loss (gain) on sale of businesses and properties			409			(58,332	)		(5,600	)
		Total expenses		8,813,808			8,403,879			8,883,023
Income (loss) from operations before income tax provision and cumulative effect of a change in accounting principle				262,747			244,008			(254,154	)
Income tax provision (benefit)				99,124			96,226			(88,996	)
Income (loss) before cumulative effect of a change in accounting principle				163,623			147,782			(165,158	)
Cumulative effect of a change in accounting principle, net of tax				—			(5,417	)		—
Net income (loss)			$	163,623		$	142,365		$	(165,158	)
Health plan services medical care ratio (MCR)				84.9	%		84.6	%		85.5	%
Government contracts/Specialty services MCR				66.6	%		65.6	%		65.5	%
Administrative (SG&A + Depreciation) Ratio				15.2	%		16.0	%		17.5	%
Health plan premiums per member per month			$	156.71		$	138.76		$	128.98
Health plan services per member per month			$	133.07		$	117.42		$	110.27

5

ENROLLMENT INFORMATION

The table below summarizes the Company's enrollment information for the last three fiscal years. Total at-risk insured enrollment decreased by approximately 1% to approximately 3.9 million members at December 31, 2000 compared to enrollment at December 31, 1999. Total insured enrollment decreased by approximately 5% to approximately 4.0 million members at December 31, 1999 compared to enrollment at December 31, 1998.

Year Ended December 31, (Amounts in thousands)	2000	Percent Change		1999	Percent Change		1998
Health Plan Services:
Commercial	2,996	4.7	%	2,862	(4.9	)%	3,008
Medicare	272	3.8	%	262	(15.2	)%	309
Medicaid	666	7.6	%	619	11.5	%	555
Continuing plans	3,934	5.1	%	3,743	(3.3	)%	3,872
Discontinued plans	3	(98.7	)%	228	(30.3	)%	327
Total Health Plan Services	3,937	(0.9	)%	3,971	(5.4	)%	4,199
Government Contracts:
TRICARE and Indemnity	562	(12.7	)%	644	(17.9	)%	784
TRICARE HMO	901	5.8	%	852	8.8	%	783
Total Government Contracts	1,463	(2.2	)%	1,496	(4.5	)%	1,567
ASO	83	(19.4	)%	103	(33.1	)%	154

    Excluding the discontinued plans, commercial membership increased 5% to approximately 3.0 million members at December 31, 2000 compared to 2.9 million members at December 31, 1999 due to membership increases in California primarily in point of service ("POS") products and in Connecticut and New York in small, mid-market, and large groups.

    Excluding the discontinued plans, Medicare membership increased 4% to 272,000 members at December 31, 2000 compared to 262,000 members at December 31, 1999 primarily due to growth in Florida and California.

    Excluding the discontinued plans, Medicaid membership increased 8% to 666,000 members at December 31, 2000 compared to 619,000 members at December 31, 1999 primarily due to increases in the Healthy Families program in California.

    Excluding the discontinued plans, commercial membership declined 5% to 2.9 million members at December 31, 1999 compared to 3.0 million members at December 31, 1998 primarily due to membership losses attributable to planned membership attrition from rigorous pricing actions.

    Excluding the discontinued plans, Medicare membership declined 15% to 262,000 members at December 31, 1999 compared to 309,000 members at December 31, 1998 primarily due to the Company exiting certain unprofitable counties, primarily in its Northeast health plans.

    Excluding the discontinued plans, Medicaid membership increased 12% to 619,000 members at December 31, 1999 compared to 555,000 members at December 31, 1998 primarily due to increased sales in the Healthy Families program in California.

    Government contracts covered approximately 1.5 million eligible individuals under the TRICARE program at December 31, 2000. Dependents of active-duty military personnel and retirees and their dependents are automatically eligible to receive benefits under the TRICARE program. Any changes in the enrollment reflect the timing of when the individuals become eligible.

6

HEALTH PLAN SERVICES PREMIUMS

Health Plan Services premiums increased $320.0 million or 5% for the year ended December 31, 2000 compared to the same period in 1999 primarily due to the following:

•

Average commercial premium rate increases of 11%,

•

Average Medicare premium rate increases of 14%, and

•

Average Medicaid premium rate increases of 2%, partially offset by

•

Net membership decrease of 0.9%.

    Health Plan Services premiums decreased $93.1 million or 1% for the year ended December 31, 1999 compared to the same period in 1998 primarily due to enrollment in the Company's health plans declining by 228,000 members. 71,000 members were from divested health plans. This was partially offset by average premium rate increases of 8% for commercial product lines, 7% for Medicare product lines, and 5% for Medicaid product lines.

GOVERNMENT CONTRACTS/SPECIALTY SERVICES

Government Contracts/Specialty Services segment revenues increased $93.3 million or 6% for the year ended December 31, 2000 compared to the same period in 1999. The increase was primarily due to an increase in TRICARE revenues comprised of:

•

Higher health care costs resulting in higher risk share revenues from the Government and

•

Increased change orders and bid price adjustments.

    This increase in TRICARE revenues is primarily due to the continuing shift in health care utilization from military facilities to civilian facilities for the three contracts the Company holds with the TRICARE programs for dependents of active-duty military personnel and retirees and their dependents.

    Government Contracts/Specialty Services segment revenues increased $118.6 million or 8% for the year ended December 31, 1999 compared to the same period in 1998. The increase in Government Contracts/Specialty Services segment revenues was primarily due to increases in TRICARE revenues and continued growth in the Company's behavioral health network.

INVESTMENT AND OTHER INCOME

Investment and other income increased $15.3 million or 18% for the year ended December 31, 2000 compared to the same period in 1999. The increase is primarily due to an increase in the average yield rate combined with higher investable assets.

    Investment and other income decreased $6.5 million or 7% for the year ended December 31, 1999 compared to the same period in 1998. The decrease is primarily due to divestiture of non-core plans during 1999.

HEALTH PLAN SERVICES MCR

Health Plan Services MCR increased to 84.9% for the year ended December 31, 2000 compared to 84.6% for the same period in 1999. This increase was primarily due to the following:

•

An increase in the pharmacy costs for the majority of the health plans, and

•

Higher fee-for-service medical costs from increased utilization of physician and hospital services.

    The Health Plans Services MCR decreased to 84.6% for the year ended December 31, 1999 from 85.5% for the same period in 1998 primarily due to an increased focus on medical management.

7

GOVERNMENT CONTRACTS/SPECIALTY SERVICES MCR

The Government Contracts/Specialty Services MCR increased to 66.6% for the year ended December 31, 2000 as compared to 65.6% for the same period in 1999. This increase was primarily due to the following:

•

Continued movement of health care services from military treatment facilities to civilian facilities which resulted in higher costs than originally specified in the contract, and

•

Managed Health Network, the Company's behavioral health care subsidiary, increased benefit payments due to parity provisions instituted by certain states during the year ended December 31, 2000. These provisions require behavioral health service providers to offer the same level of services to all current health plan members.

    The Government Contracts/Specialty Services MCR increased to 65.6% for the year ended December 31, 1999 as compared to 65.5% for the same period in 1998. This increase for 1999 was primarily due to the movement of health care services from military treatment facilities to civilian facilities which resulted in higher costs than originally specified in the contract.

SELLING, GENERAL AND ADMINISTRATIVE COSTS

The administrative expense ratio (SG&A and depreciation as a percentage of Health Plan Services revenues and Government Contracts/Specialty Services revenues) decreased to 15.2% for the year ended December 31, 2000 from 16.0% for the same period in 1999. This decrease was primarily attributable to:

•

The Company's ongoing efforts to control its SG&A expenses,

•

Improved efficiencies associated with consolidating certain administrative processing functions in the Western and Eastern Divisions, and

•

Continued fixed cost savings from the 1999 disposition of certain non-core plans.

    The administrative expense ratio decreased to 16.0% for the year ended December 31, 1999 from 17.5% for the same period in 1998. This decrease was primarily attributable to the Company's efforts to control its SG&A expenses and savings associated with consolidating certain health plans.

AMORTIZATION AND DEPRECIATION

Amortization and depreciation expense decreased by $6.1 million or 5% for the year ended December 31, 2000 from the same period in 1999. This decrease was primarily due to reductions of $7.6 million in goodwill and $17.5 million in properties and equipment as a result of divestitures of certain operations.

    Amortization and depreciation expense decreased by $16.1 million or 13% for the year ended December 31, 1999 compared to the same period in 1998. This decrease was primarily due to a $61.2 million write-down of fixed assets in the fourth quarter of 1998 and impairment charges for goodwill in 1998 that amounted to $30.0 million. See "Asset Impairment, Merger, Restructuring and Other Costs" below and Note 15 to the consolidated financial statements.

INTEREST EXPENSE

Interest expense increased by $4.1 million or 5% for the year ended December 31, 2000 from the same period in 1999. This increase in interest expense reflects the higher average borrowing rate of 7.6% in 2000 compared to 7.2% in 1999. This increase in the average borrowing rate was partially offset by a reduction in the average revolving credit facility balance.

    Interest expense decreased by $8.4 million or 9% for the year ended December 31, 1999 from the same period in 1998. This decrease was due to a net decline in the revolving credit borrowings primarily as a result of cash proceeds from divestitures.

8

ASSET IMPAIRMENT, MERGER, RESTRUCTURING AND OTHER COSTS

This section should be read in conjunction with Notes 14 and 15, and the tables contained therein, to the consolidated financial statements.

1999 CHARGES

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 in 1999 its plan to close the Colorado regional processing center, terminate employees and transfer its operations to the Company's other administrative facilities. In addition, the Company also announced its plans to consolidate certain administrative functions in its Oregon and Washington health plan operations. During the year ended December 31, 1999, the Company recorded pretax charges for restructuring and other charges of $21.1 million (the "1999 Charges") and $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 Northwest 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 December 31, 2000, termination of the employees was completed and $17.2 million had been paid. There are no expected future cash outlays. Modifications to the initial estimate of $1.3 million were recorded during the year ended December 31, 1999.

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.

REAL ESTATE LEASE TERMINATION AND OTHER COSTS—The 1999 Charges included $2.6 million related to termination of real estate obligations and other costs to close the Colorado regional processing center.

    The 1999 restructuring plan was completed as of December 31, 2000.

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.

SEVERANCE AND BENEFIT RELATED COSTS—During the year ended December 31, 1998, the Company recorded severance costs of $21.2 million related to staff reductions in selected health plans and the corporate centralization and consolidation. This plan included the termination of 683 employees in seven geographic locations primarily relating to corporate finance and human resources functions and California operations. As of December 31, 1999, the termination of employees had been completed and $20.1 million had been recorded as severance under this plan.

FPA MEDICAL MANAGEMENT—On July 19, 1998, FPA Medical Management, Inc. ("FPA") filed for bankruptcy protection under Chapter 11 of the Federal Bankruptcy Code. FPA, through its affiliated medical groups, provided services to approximately 190,000 of the Company's affiliated members in Arizona and California and also leased health care facilities from the Company. FPA has discontinued its medical group operations in these markets and the Company has made other arrangements for health care services to the Company's affiliated members. The FPA bankruptcy and related events and circumstances caused management to re-evaluate the decision to continue to operate the facilities and management determined to sell the 14 properties, subject to bankruptcy court approval. Management immediately commenced the sale process upon such determination. The estimated fair value of the assets held for disposal was determined based on the estimated sales prices

9

less the related costs to sell the assets. Management believed that the net proceeds from a sale of the facilities would be inadequate to enable the Company to recover their carrying value. Based on management's best estimate of the net realizable values, the Company recorded charges totaling approximately $84.1 million. These charges were comprised of $63.0 million for real estate asset impairments, $10.0 million impairment adjustment of a note received as consideration in connection with the 1996 sale of the Company's physician practice management business and $11.1 million for other items. These other items included payments made to Arizona physician specialists totaling $3.4 million for certain obligations that FPA had assumed but was unable to pay due to its bankruptcy, advances to FPA to fund certain operating expenses totaling $3.0 million, and other various costs totaling $4.7 million. The carrying value of the assets held for disposal totaled $9.9 million at December 31, 2000. There have been no further adjustments to the carrying value of these assets held for disposal. As of December 31, 2000, 12 properties have been sold which has resulted in net gains of $5.0 million during 1999 and $3.6 million in 1998 which are included in net gains on sale of businesses and buildings. The remaining properties are expected to be sold during 2001. The effects of the suspension of real estate depreciation on the respective properties had an impact of approximately $2.0 million in 1998 and were immaterial during 2000 and 1999. The results of operations attributable to FPA real estate assets were immaterial during 1998, 1999 and 2000.

ASSET IMPAIRMENT AND OTHER CHARGES—During the fourth quarter ended December 31, 1998, the Company recorded impairment and other charges totaling $118.4 million. Of this amount, $112.4 million related to impairment of certain long-lived assets held for disposal and $6 million related to the FPA bankruptcy.

OTHER COSTS—The Company recorded other costs of $22.4 million which included the adjustment of amounts due from a third-party hospital system that filed for bankruptcy which were not related to the normal business of the Company totaling $18.6 million, and $3.8 million related to other items such as fees for consulting services from one of the Company's prior executives and costs related to exiting certain rural Medicare markets.

    During 1999, modifications of $12.6 million to the initial estimates were recorded. These credits to the 1998 charges included: $10.7 million from reductions to asset impairment costs and $1.9 million from reductions to initially anticipated involuntary severance costs and other adjustments.

NET GAIN (LOSS) ON SALE OF BUSINESSES AND PROPERTIES

Net loss on sale of businesses and properties for the year ended December 31, 2000 was comprised of the following:

•

Gain on sale of a building in California of $1.1 million, and

•

Loss on sale of HMO operations in Washington due to purchase price adjustment of $1.5 million.

    Net gain on sale of businesses and properties for the year ended December 31, 1999 was comprised of the following:

•

Gain on sale of pharmacy benefits management operations of $60.6 million,

•

Net loss on sale of non-core operations of $9.1 million, and

•

Gain on sale of buildings of $6.8 million.

    Gain on sale of businesses and properties for the year ended December 31, 1998 was comprised of a net gain on the sale of buildings of $4.4 million and a gain on the sale of certain call center operations of $1.2 million.

INCOME TAX PROVISION AND BENEFIT

The effective income tax rate was 37.7% for the year ended December 31, 2000 compared with 39.4% for the same period in 1999. The rate declined primarily due to tax minimization strategies and related to the Company's change in business mix after divestiture of non-core operations.

    The effective income tax rate was 39.4% for the year ended December 31, 1999 compared with a tax benefit rate of 35.0% for the same period in 1998. The change was mainly due to non-deductible impairment charges incurred in 1998.

10

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 continue to be proposed during legislative sessions. If further 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, increased cost of medical services, utilization, new technologies and drugs, 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 California HMO subsidiary contracts with providers in California primarily through capitation fee arrangements. The Company's other HMO subsidiaries contract with providers, to a lesser degree, in other areas 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. The California agency that until July 1, 1999 acted as regulator of HMOs, had issued a written statement to the effect that HMOs are not liable for such claims. However, there is currently ongoing litigation on the subject among providers and HMOs, including the Company's California HMO subsidiary.

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

11

contracts. The Company believes it is in compliance with these contractual and regulatory requirements in all material respects.

    The Company believes that cash from operations, existing working capital, lines of credit, and funds from planned divestitures of business are adequate to fund existing obligations, introduce new products and services, and continue to develop health care-related businesses. The Company regularly evaluates cash requirements for current operations and commitments, and for capital acquisitions and other strategic transactions. The Company may elect to raise additional funds for these purposes, either through additional debt or equity, the sale of investment securities or otherwise, as appropriate.

    The Company's investment objective is to maintain safety and preservation of principal by investing in high-quality, investment grade securities while maintaining liquidity in each portfolio sufficient to meet the Company's cash flow requirements and attaining the highest total return on invested funds.

    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.

    In December 2000, the Company's subsidiary, Health Net Federal Services, Inc., and the Department of Defense agreed to a settlement of approximately $389 million for outstanding receivables related to the Company's three TRICARE contracts and for the completed contract for the CHAMPUS Reform Initiative. Approximately $60 million of the settlement amount was received in December 2000. The majority of the remaining settlement that was received on January 5, 2001 reduced the amounts receivable under government contracts on the Company's balance sheets. The receivable items settled by this payment include change orders, bid price adjustments, equitable adjustments and claims. These receivables developed as a result of TRICARE health care costs rising faster than the forecasted health care cost trends used in the original contract bids, data revisions on formal contract adjustments, and routine contract changes for benefits. The settlement amount, after paying vendors, providers and amounts owed back to the government, will be applied to the continuing operating needs of the three TRICARE contracts and to reducing the outstanding balance of the notes payable.

    In 1997, the Company purchased convertible and nonconvertible debentures of FOHP, Inc., a New Jersey corporation ("FOHP"), in the aggregate principal amounts of approximately $80.7 million and $24.0 million, respectively. In 1997 and 1998, the Company converted certain of the convertible debentures into shares of Common Stock of FOHP, resulting in the Company owning 99.6% of the outstanding common stock of FOHP. The nonconvertible debentures mature on December 31, 2002.

    Effective January 1, 1999, Physicians Health Services of New Jersey, Inc., a New Jersey HMO wholly-owned by the Company, merged with and into First Option Health Plan of New Jersey ("FOHP-NJ"), a New Jersey HMO subsidiary of FOHP, and FOHP-NJ changed its name to Physicians Health Services of New Jersey, Inc. ("PHS-NJ"). Effective July 30, 1999, upon approval by the stockholders of FOHP at a special meeting, a wholly-owned subsidiary of the Company merged into FOHP and FOHP became a wholly-owned subsidiary of the Company. In connection with the merger, the former minority shareholders of FOHP are entitled to receive either $0.25 per share (the value per FOHP share as of December 31, 1998 as determined by an outside appraiser) or payment rights which entitle the holders to receive as much as $15.00 per payment right on or about July 1, 2001, provided certain hospital and other provider participation conditions are met. Also in connection with the merger, additional consideration of $2.25 per payment right will be paid to certain holders of the payment rights if PHS-NJ achieves certain annual returns on common equity and the participation conditions are met. As of December 31, 2000, the Company determined that it is probable that these

12

payment rights would be paid on or about July 1, 2001. Accordingly, the Company recorded a current liability and a purchase price adjustment to goodwill of $33.7 million as of December 31, 2000.

OPERATING CASH FLOWS

Net cash provided by operating activities was $366.2 million at December 31, 2000 compared to $297.1 million at December 31, 1999. The increase in operating cash flows was due primarily to:

•

Higher net income,

•

Liabilities associated with the 1998 and 1999 restructuring plans eliminated by December 31, 2000, and

•

Liabilities associated with plans sold in 1999 which were eliminated.

INVESTING ACTIVITIES

Net cash used in investing activities was $61.9 million for December 31, 2000 compared to net cash provided by investing activities of $163.4 million for December 31, 1999. This decrease is primarily due to proceeds from the sale in 1999 of certain businesses and buildings of $137.7 million.

    In 1995, the Company entered into a five year tax retention operating lease for the construction of various health care centers and a corporate facility. Upon expiration in May 2000, the lease was extended for four months through September 2000 whereupon the Company settled its obligations under the agreement and purchased the leased properties which were comprised of three rental health care centers and a corporate facility for $35.4 million. The health care centers are held as investment rental properties and are included in other noncurrent assets. The corporate facility building is used in operations and included in property and equipment. The buildings are being depreciated over a remaining useful life of 35 years.

    Throughout 2000 and the first quarter of 2001, the Company has provided funding in the amount of approximately $4.2 million in MedUnite, Inc., an independent company, funded and organized by seven major managed health care companies. MedUnite, Inc. is designed to provide on-line internet provider connectivity services including eligibility information, referrals, authorizations, claims submission and payment. The funded amounts are included in other noncurrent assets.

    During 2000, the Company secured an exclusive e-business connectivity services contract from the Connecticut State Medical Society IPA, Inc. ("CSMS-IPA") for $15.0 million. CSMS-IPA is an association of medical doctors providing health care primarily in Connecticut. The amounts paid to CSMS-IPA for this agreement are included in other noncurrent assets.

FINANCING ACTIVITIES

Net cash used in financing activities was $268.1 million at December 31, 2000 compared to $213.9 million at December 31, 1999. This increase was primarily due to higher repayment of funds previously drawn under the Company's Credit Facility in 2000 compared to 1999 (as defined below), which were partially offset by additional drawings under the Credit Facility.

    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, March 1999 and September 2000 (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 December 31, 2000, the Company was in compliance with the financial covenants of

13

the Credit Facility, as amended by the Amendments. As of December 31, 2000, the maximum commitment level under the Credit Agreement was approximately $1.36 billion, of which approximately $590 million remained available. The total outstanding balance under the Credit Agreement was $766.5 million as of December 31, 2000. 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 $45.5 million to certain of its subsidiaries to meet capital requirements during the year ended December 31, 2000. As of December 31, 2000, the Company's subsidiaries were in compliance with minimum capital requirements.

    In March 1998, the National Association of Insurance Commissioners adopted the Codification of Statutory Accounting Principles ("Codification"). The Codification, which is intended to standardize regulatory accounting and reporting to state insurance departments, was effective January 1, 2001. However, statutory accounting principles continue to be established by individual state laws and permitted practices. Certain states in which the Company conducts business required the adoption of Codification for the preparation of statutory financial statements effective January 1, 2001. The Company estimates that the adoption of Codification will reduce the statutory net worth of the Company's subsidiaries as of January 1, 2001 by approximately $1.2 million, which primarily relates to accounting principles regarding electronic data processing equipment, unpaid claims adjustments, provider receivables, accident and health premiums due and unpaid, and deferred income taxes. Such reduction may require the Company to contribute additional capital to its subsidiaries to satisfy minimum statutory net worth requirements.

    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.

    As a result of the above requirements and other regulatory requirements, certain subsidiaries are subject to restrictions on their ability to make dividend payments, loans or other transfers of cash to the Company. Such restrictions, unless amended or waived, limit the use of any cash generated by these subsidiaries to pay obligations of the Company. The maximum amount of dividends which can be paid by the insurance company subsidiaries to the Company without prior approval of the insurance departments is subject to restrictions relating to statutory surplus, statutory income and unassigned surplus. Management believes that as of December 31, 2000, all of the Company's health plans and insurance subsidiaries met their respective regulatory requirements.

HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996 ("HIPAA")

In December 2000, the Department of Health and Human Services ("DHHS") promulgated certain regulations under HIPAA related to the privacy of individually identifiable health information (protected health information or "PHI"). The new regulations require health plans, clearinghouses and providers to (a) comply with various requirements and restrictions related to the use, storage and disclosure of PHI, (b) adopt rigorous internal procedures to protect PHI and (c) enter into specific written agreements with business associates to whom PHI is disclosed. The regulations establish significant criminal penalties and civil sanctions for non-compliance. In addition, the regulations could expose the Company to additional liability for, among other things, violations by its business associates. In February 2001, the DHHS stated that the regulations in their current form would require compliance by April 2003. The Company believes that the costs required to comply with the regulations

14

will be significant and may have a material adverse impact on the Company's business or results of operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to interest rate and market risk primarily due to its investing and borrowing activities. Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest rates and in equity prices. Interest rate risk is a consequence of maintaining fixed income investments. The Company is exposed to interest rate risks arising from changes in the level or volatility of interest rates, prepayment speeds and/or the shape and slope of the yield curve. In addition, the Company is exposed to the risk of loss related to changes in credit spreads. Credit spread risk arises from the potential that changes in an issuer's credit rating or credit perception may affect the value of financial instruments.

    The Company has several bond portfolios to fund reserves. The Company attempts to manage the interest rate risks related to its investment portfolios by actively managing the asset/liability duration of its investment portfolios. The overall goal for 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 has 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 $2.3 million as of December 31, 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 $766 million at December 31, 2000 with a related average interest rate of 7.5% (which interest rate is subject to change pursuant to the terms of the Credit Facility). See a description of the Credit Facility under "Liquidity and Capital Resources."

15

    The following table presents the expected cash outflows of market risk sensitive debt obligations at December 31, 2000. These cash outflows include both expected principal and interest payments consistent with the terms of the outstanding debt as of December 31, 2000.

(Amounts in thousands)			2001		2002		2003		2004		2005		Beyond		Total
Long-term floating rate borrowing:
	Principal		$	—	$	766,450	$	—	$	—	$	—	$	—	$	766,450
	Interest			55,725		27,860		—		—		—		—		83,585
		Total cash outflow	$	55,725	$	794,310	$	—	$	—	$	—	$	—	$	850,035

16

REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS OF
HEALTH NET, INC.

The Board of Directors of the Company addresses its oversight responsibility for the consolidated financial statements through its Audit Committee (the "Committee"). The Committee currently consists of Gov. George Deukmejian, Thomas T. Farley, Richard J. Stegemeier (Chairman), and Bruce G. Willison, each of whom is an independent outside director.

    In fulfilling its responsibilities in 2000, the Committee reviewed the overall scope of the independent auditors' audit plan and reviewed the independent auditors' non-audit services to the Company. The Committee also exercised oversight responsibilities over various financial and regulatory matters.

    The Committee's meetings are designed to facilitate open communication between the independent auditors and Committee members. To ensure auditor independence, the Committee meets privately with both the independent auditors and also with the chief auditor of the Company's Internal Audit Department, thereby providing for full and free access to the Committee.

/s/ RICHARD J. STEGEMEIER
Richard J. Stegemeier
Audit Committee Chairman
March 2, 2001

17

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of
Health Net, Inc.
Woodland Hills, California

We have audited the accompanying consolidated balance sheets of Health Net, Inc. and subsidiaries (the "Company") as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

    We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

    In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Health Net, Inc. and subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
February 20, 2001

18

CONSOLIDATED BALANCE SHEETS
HEALTH NET, INC.

		December 31,
(Amounts in thousands)		2000			1999
Assets
Current Assets:
	Cash and cash equivalents	$	1,046,735		$	1,010,539
	Investments—available for sale		486,902			456,603
	Premiums receivable, net of allowance for doubtful accounts (2000—$19,822; 1999—$21,937)		174,654			149,992
	Amounts receivable under government contracts		334,187			290,329
	Deferred taxes		141,752			209,037
	Reinsurance and other receivables		141,140			153,427
	Other assets		74,184			77,866
Total current assets			2,399,554			2,347,793
Property and equipment, net			296,009			280,729
Goodwill and other intangible assets, net			863,419			909,586
Other noncurrent assets			111,134			158,373
Total Assets		$	3,670,116		$	3,696,481
Liabilities and Stockholders' Equity
Current Liabilities:
	Reserves for claims and other settlements		1,242,389			1,138,801
	Unearned premiums		238,571			224,381
	Notes payable and capital leases		49			1,256
	Amounts payable under government contracts		972			43,843
	Accounts payable and other liabilities		329,100			322,048
Total current liabilities			1,811,081			1,730,329
Notes payable and capital leases			766,450			1,039,352
Deferred taxes			8,635			5,624
Other noncurrent liabilities			22,819			29,977
Total Liabilities			2,608,985			2,805,282
Commitments and contingencies
Stockholders' Equity:
	Preferred stock ($0.001 par value, 10,000 shares authorized, none issued and outstanding)		—			—
	Class A common stock ($0.001 par value, 350,000 shares authorized; issued 2000—125,994; 1999—123,429)		126			124
	Class B non-voting convertible common stock ($0.001 par value, 30,000 shares authorized; issued and outstanding 2000—0; 1999—2,138)		—			2
	Additional paid-in capital		649,166			643,372
	Treasury Class A common stock, at cost (2000—3,194 shares; 1999—3,194 shares)		(95,831	)		(95,831	)
	Retained earnings		511,224			347,601
	Accumulated other comprehensive loss		(3,554	)		(4,069	)
Total Stockholders' Equity			1,061,131			891,199
Total Liabilities and Stockholders' Equity		$	3,670,116		$	3,696,481

See accompanying notes to consolidated financial statements.

19

CONSOLIDATED STATEMENTS OF OPERATIONS
HEALTH NET, INC.

			Year Ended December 31,
(Amounts in thousands, except per share data)			2000		1999			1998
Revenues
	Health plan services premiums		$	7,351,098	$	7,031,055		$	7,124,161
	Government contracts/Specialty services			1,623,158		1,529,855			1,411,267
	Investment and other income			102,299		86,977			93,441
		Total revenues		9,076,555		8,647,887			8,628,869
Expenses
	Health plan services			6,242,282		5,950,002			6,090,472
	Government contracts/Specialty services			1,080,407		1,002,893			924,075
	Selling, general and administrative			1,296,881		1,301,743			1,413,771
	Depreciation			67,260		70,010			78,951
	Amortization			38,639		42,031			49,142
	Interest			87,930		83,808			92,159
	Asset impairment, merger, restructuring and other costs			—		11,724			240,053
	Net loss (gain) on sale of businesses and properties			409		(58,332	)		(5,600	)
		Total expenses		8,813,808		8,403,879			8,883,023
Income (loss) from operations before income taxes and cumulative effect of a change in accounting principle				262,747		244,008			(254,154	)
Income tax provision (benefit)				99,124		96,226			(88,996	)
Income (loss) before cumulative effect of a change in accounting principle				163,623		147,782			(165,158	)
Cumulative effect of a change in accounting principle, net of tax				—		(5,417	)		—
Net income (loss)			$	163,623	$	142,365		$	(165,158	)
Basic earnings (loss) per share:
	Income (loss) from operations		$	1.34	$	1.21		$	(1.35	)
	Cumulative effect of a change in accounting principle			—		(0.05	)		—
Net			$	1.34	$	1.16		$	(1.35	)
Diluted earnings (loss) per share:
	Income (loss) from operations		$	1.33	$	1.21		$	(1.35	)
	Cumulative effect of a change in accounting principle			—		(0.05	)		—
Net			$	1.33	$	1.16		$	(1.35	)
Weighted average shares outstanding:
	Basic			122,471		122,289			121,974
	Diluted			123,453		122,343			121,974

See accompanying notes to consolidated financial statements.

20

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
HEALTH NET, INC.

	Common Stock
	Class A			Class B
									Additional Paid-in Capital
(Amounts in thousands)	Shares	Amount		Shares		Amount
Balance at January 1, 1998	114,449	$	115	10,298		$	10		$	628,610
Comprehensive income (loss):
Total comprehensive income (loss)	—		—	—			—			—
Exercise of stock options including related tax benefit	497		1							9,584
Conversion of Class B to Class A	5,250		5	(5,250	)		(5	)
Employee stock purchase plan	166									3,625
Balance at December 31, 1998	120,362		121	5,048			5			641,819
Comprehensive income:
Total comprehensive income	—		—	—			—			—
Exercise of stock options including related tax benefit	5
Conversion of Class B to Class A	2,910		3	(2,910	)		(3	)
Employee stock purchase plan	152									1,553
Balance at December 31, 1999	123,429		124	2,138			2			643,372
Comprehensive income:
Total comprehensive income	—		—	—			—			—
Exercise of stock options including related tax benefit	314									4,683
Conversion of Class B to Class A	2,138		2	(2,138	)		(2	)
Employee stock purchase plan	113									1,111
Balance at December 31, 2000	125,994	$	126	—		$	—		$	649,166

See accompanying notes to consolidated financial statements.

21

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
HEALTH NET, INC.

		Common Stock Held in Treasury
										Accumulated Other Comprehensive Income (Loss)
							Retained Earnings
(Amounts in thousands)		Shares		Amount									Total
Balance at January 1, 1998		(3,194	)	$	(95,831	)	$	370,394		$	(7,324	)	$	895,974
Comprehensive income (loss):
	Net loss							(165,158	)					(165,158	)
	Change in unrealized depreciation on investments, net of tax of $11										16			16
Total comprehensive income (loss)		—			—			(165,158	)		16			(165,142	)
Exercise of stock options including related tax benefit														9,585
Conversion of Class B to Class A														—
Employee stock purchase plan														3,625
Balance at December 31, 1998		(3,194	)		(95,831	)		205,236			(7,308	)		744,042
Comprehensive income:
	Net income							142,365						142,365
	Change in unrealized depreciation on investments, net of tax of $2,159										3,239			3,239
Total comprehensive income		—			—			142,365			3,239			145,604
Exercise of stock options including related tax benefit														—
Conversion of Class B to Class A														—
Employee stock purchase plan														1,553
Balance at December 31, 1999		(3,194	)		(95,831	)		347,601			(4,069	)		891,199
Comprehensive income:
	Net income							163,623						163,623
	Change in unrealized depreciation on investments, net of tax of $343										515			515
Total comprehensive income		—			—			163,623			515			164,138
Exercise of stock options including related tax benefit														4,683
Conversion of Class B to Class A														—
Employee stock purchase plan														1,111
Balance at December 31, 2000		(3,194	)	$	(95,831	)	$	511,224		$	(3,554	)	$	1,061,131

See accompanying notes to consolidated financial statements.

22

CONSOLIDATED STATEMENTS OF CASH FLOWS
HEALTH NET, INC.

		Year Ended December 31,
(Amounts in thousands)		2000			1999			1998
Cash Flows from Operating Activities:
Net income (loss)		$	163,623		$	142,365		$	(165,158	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Amortization and depreciation		105,899			112,041			128,093
	Net loss (gain) on sale of businesses and properties		409			(58,332	)		(5,600	)
	Cumulative effect of a change in accounting principle		—			5,417			—
	Impairment of assets		—			11,724			159,066
	Other changes		10,035			5,648			15,041
Changes in assets and liabilities, net of effects of dispositions:
	Premiums receivable and unearned premiums		(10,472	)		(8,973	)		38,569
	Other assets		105,659			63,902			(69,671	)
	Amounts receivable/payable under government contracts		(86,729	)		5,130			(58,000	)
	Reserves for claims and other settlements		103,588			167,084			(6,416	)
	Accounts payable and other liabilities		(25,849	)		(148,878	)		64,943
Net cash provided by operating activities			366,163			297,128			100,867
Cash Flows from Investing Activities:
Sales or maturities of investments			304,523			642,150			727,435
Purchase of investments			(253,141	)		(606,350	)		(697,472	)
Net purchases of property and equipment			(86,853	)		(36,592	)		(147,782	)
Sale of net assets of discontinued operations			—			—			257,100
Proceeds from sale of businesses and properties			3,505			137,728			—
Other			(29,943	)		26,486			7,682
Net cash (used in) provided by investing activities			(61,909	)		163,422			146,963
Cash Flows from Financing Activities:
Proceeds from exercise of stock options and employee stock purchases			5,794			1,553			13,209
Proceeds from issuance of notes payable and other financing arrangements			250,033			221,276			155,575
Repayment of debt and other non-current liabilities			(523,885	)		(436,705	)		(212,109	)
Net cash used in financing activities			(268,058	)		(213,876	)		(43,325	)
Net increase in cash and cash equivalents			36,196			246,674			204,505
Cash and cash equivalents, beginning of year			1,010,539			763,865			559,360
Cash and cash equivalents, end of year		$	1,046,735		$	1,010,539		$	763,865
Supplemental Cash Flows Disclosure:
Interest paid		$	87,023		$	85,212		$	85,981
Income taxes paid (refunded)			9,694			6,106			(87,799	)
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Capital lease obligations			—			—		$	2,530
Notes and stocks received on sale of businesses			—			22,909			—
Conversion of FOHP convertible debentures to equity			—			—			1,197

See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—DESCRIPTION OF BUSINESS

On November 3, 2000, the Company changed its name from Foundation Health Systems, Inc. to Health Net, Inc. and changed its ticker symbol on the New York Stock Exchange (effective November 6, 2000) from "FHS" to "HNT." The Company accomplished the name change by merging a wholly-owned subsidiary, HNI Shell, Inc., with and into the Company and, in connection with such merger, amending its Fourth Amended and Restated Certificate of Incorporation to change the Company's name to Health Net, Inc.

    The current operations of Health Net, Inc. (the "Company" or "HNT") are a result of the April 1, 1997 merger transaction (the "FHS Combination") involving Health Systems International, Inc. ("HSI") and Foundation Health Corporation ("FHC"). Pursuant to the FHS Combination, FH Acquisition Corp., a wholly-owned subsidiary of HSI ("Merger Sub"), merged with and into FHC and FHC survived as a wholly-owned subsidiary of HSI, which changed its name to "Foundation Health Systems, Inc." and thereby became the Company. Pursuant to the Agreement and Plan of Merger (the "Merger Agreement") that evidenced the FHS Combination, FHC stockholders received 1.3 shares of the Company's Class A Common Stock for every share of FHC common stock held, resulting in the issuance of approximately 76.7 million shares of the Company's Class A Common Stock to FHC stockholders. The shares of the Company's Class A Common Stock issued to FHC's stockholders in the FHS Combination constituted approximately 61% of the outstanding stock of the Company after the FHS Combination and the shares held by the Company's stockholders prior to the FHS Combination (i.e. the prior stockholders of HSI) constituted approximately 39% of the outstanding stock of the Company after the FHS Combination.

    The FHS Combination was accounted for as a pooling of interests for accounting and financial reporting purposes. The pooling of interests method of accounting is intended to present, as a single interest, two or more common stockholder interests which were previously independent and assumes that the combining companies have been merged from inception.

    The Company is an integrated managed care organization which administers the delivery of managed health care services through two segments: Health Plan Services and Government Contracts/Specialty Services. Through its subsidiaries, the Company offers group, individual, Medicaid and Medicare health maintenance organization ("HMO"), point of service ("POS") 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.

    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 (Connecticut, Florida, New Jersey, New York, Ohio, Pennsylvania and West Virginia) and the Western Division (Arizona, California and Oregon). The Company is one of the largest managed health care companies in the United States, with approximately 4.0 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 35 states and the District of Columbia.

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    The Government Contracts/Specialty Services segment administers large, multi-year managed care government contracts. This segment subcontracts to affiliated and unrelated third parties the administration and health care risk of parts of these contracts and currently administers health care programs covering 1.5 million eligible individuals under TRICARE (formerly known as the Civilian Health and Medical Program of the Uniformed Services ("CHAMPUS")). The Company has three TRICARE contracts that cover Alaska, Arkansas, California, Hawaii, Oklahoma, Oregon and Washington, and parts of Arizona, Idaho, Louisiana and Texas. This segment also offers behavioral health, dental, vision, and pharmaceutical products and services as well as managed care products related to bill review, administration and cost containment for hospitals, health plans and other entities.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION AND BASIS OF PRESENTATION

The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation.

RECLASSIFICATIONS

Certain amounts in the 1999 and 1998 consolidated financial statements and notes have been reclassified to conform to the 2000 presentation. The reclassifications have no effect on net earnings or losses or stockholders' equity as previously reported.

REVENUE RECOGNITION

Health plan services premium revenues include HMO, POS and PPO premiums from employer groups and individuals and from Medicare recipients who have purchased supplemental benefit coverage, which premiums are based on a predetermined prepaid fee, Medicaid revenues based on multi-year contracts to provide care to Medicaid recipients, and revenue under Medicare risk contracts to provide care to enrolled Medicare recipients. Revenue is recognized in the month in which the related enrollees are entitled to health care services. Premiums collected in advance are recorded as unearned premiums.

    Government contracts revenues are recognized in the month in which the eligible beneficiaries are entitled to health care services. Government contracts also contain cost and performance incentive provisions which adjust the contract price based on actual performance, and revenue under government contracts is subject to price adjustments attributable to inflation and other factors. The effects of these adjustments are recognized on a monthly basis, although the final determination of these amounts could extend significantly beyond the period during which the services were provided. Amounts receivable under government contracts are comprised primarily of estimated amounts receivable under these cost and performance incentive provisions, price adjustments, and change orders for services not originally specified in the contracts. These receivables develop as a result of TRICARE health care costs rising faster than the forecasted health care cost trends used in the original contract bids, data revisions on formal contract adjustments and routine contract changes for benefit adjustments. Specialty services revenues are recognized in the month in which the administrative services are performed or the period that coverage for services is provided.

    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 accounting principles generally accepted in the United States of America to revenue recognition issues in financial statements. The Company adopted SAB 101 effective October 1, 2000. The adoption of SAB 101 did not have a material effect on the Company's consolidated financial position or results of operations.

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HEALTH CARE SERVICES

The cost of health care services is recognized in the period in which services are provided and includes an estimate of the cost of services which have been incurred but not yet reported. Such costs include payments to primary care physicians, specialists, hospitals, outpatient care facilities and the costs associated with managing the extent of such care. The Company estimates the amount of the provision for service costs incurred but not reported using standard actuarial methodologies based upon historical data including the period between the date services are rendered and the date claims are received and paid, denied claim activity, expected medical cost inflation, seasonality patterns and changes in membership. The estimates for service costs incurred but not reported are made on an accrual basis and adjusted in future periods as required. Any adjustments to the prior period estimates are included in the current period. Such estimates are subject to the impact of changes in the regulatory environment and economic conditions. Given the inherent variability of such estimates, the actual liability could differ significantly from the amounts provided. While the ultimate amount of claims and losses paid are dependent on future developments, management is of the opinion that the recorded reserves are adequate to cover such costs. These liabilities are reduced by estimated amounts recoverable from third parties for subrogation.

    The Company's HMO in California generally contracts with various medical groups to provide professional care to certain of its members on a capitated, or fixed per member per month fee basis. Capitation contracts generally include a provision for stop-loss and non-capitated services for which the Company is liable. Professional capitated contracts also generally contain provisions for shared risk, whereby the Company and the medical groups share in the variance between actual costs and predetermined goals. Additionally, the Company contracts with certain hospitals to provide hospital care to enrolled members on a capitation basis. The Company's HMOs in other states also contract with hospitals, physicians and other providers of health care, pursuant to discounted fee-for-service arrangements, hospital per diems, and case rates under which providers bill the HMOs for each individual service provided to enrollees.

    The Company assesses the profitability of contracts for providing health care services when operating results or forecasts indicate probable future losses. Contracts are grouped in a manner consistent with the method of determining premium rates. Losses are determined by comparing anticipated premiums to the total of health care related costs less reinsurance recoveries, if any, and the cost of maintaining the contracts. Losses, if any, are recognized in the period the loss is determined and are classified as Health Plan Services.

CASH AND CASH EQUIVALENTS

Cash equivalents include all highly liquid investments with a maturity of three months or less when purchased.

    The Company and its consolidated subsidiaries are required to set aside certain funds for restricted purposes pursuant to regulatory requirements. As of December 31, 1999, the cash and cash equivalents balance of $52.9 million was restricted and included in other noncurrent assets. There were no such restricted amounts as of December 31, 2000.

INVESTMENTS

Investments classified as available for sale are reported at fair value based on quoted market prices, with unrealized gains and losses excluded from earnings and reported as other comprehensive income, net of income tax effects. The cost of investments sold is determined in accordance with the specific identification method and realized gains and losses are included in investment income.

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    Certain debt investments are held by trustees or agencies pursuant to state regulatory requirements. These investments totaled $7.2 million and $31.8 million as of December 31, 2000 and 1999, respectively, and are included in other noncurrent assets (see Note 11). Market values approximate carrying value at December 31, 2000 and 1999.

GOVERNMENT CONTRACTS

Amounts receivable or payable under government contracts are based on three TRICARE contracts in five regions which include both amounts billed ($1.2 million and $5.1 million of net receivables at December 31, 2000 and 1999, respectively) and estimates for amounts to be received under cost and performance incentive provisions, price adjustments and change orders for services not originally specified in the contracts. Such estimates are determined based on information available as well as historical performance and collection of which could extend for periods beyond a year. Differences, which may be material, between the amounts estimated and final amounts collected are recorded in the period when determined.

    In December 2000, the Company's subsidiary, Health Net Federal Services, Inc. and the Department of Defense agreed to a settlement of approximately $389 million for outstanding receivables related to the Company's three TRICARE contracts and for the completed contract for the CHAMPUS Reform Initiative. Approximately $60 million of the settlement amount was received in December 2000. The remaining settlement amount was received on January 5, 2001.

    Additionally, the reserves for claims and other settlements include approximately $205.3 million and $189.7 million relating to health care services provided under these contracts as of December 31, 2000 and 1999, respectively.

PROPERTY AND EQUIPMENT

Property and equipment are stated at historical cost less accumulated depreciation. Depreciation is computed using the straight-line method over the lesser of estimated useful lives of the various classes of assets or the lease term. The useful life for buildings and improvements is estimated at 35 to 40 years, and the useful lives for furniture, equipment and software range from three to eight years (see Note 5).

    Effective January 1, 1999, the Company adopted Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" and changed its method of accounting for the costs of internally developed computer software. The change involved capitalizing certain consulting costs, payroll and payroll related costs for employees related to computer software developed for internal use and subsequently amortizing such costs over a three to five year period. The Company had previously expensed such costs.

    Expenditures for maintenance and repairs are expensed as incurred. Major improvements which increase the estimated useful life of an asset are capitalized. Upon the sale or retirement of assets, the recorded cost and the related accumulated depreciation are removed from the accounts, and any gain or loss on disposal is reflected in operations.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets arise primarily as a result of various business acquisitions and consist of identifiable intangible assets acquired and the excess of the cost of the acquisitions over the tangible and intangible assets acquired and liabilities assumed (goodwill). Identifiable intangible assets consist of the value of employer group contracts, provider networks, non-compete agreements and debt issuance costs. Goodwill and other intangible assets are amortized using the straight-line method over the estimated lives of the related assets listed below. In accordance with Accounting Principles Board

27

("APB") Opinion No. 17, the Company periodically evaluates these estimated lives to determine if events and circumstances warrant revised periods of amortization. The Company further evaluates the carrying value of its goodwill and other intangible assets based on estimated fair value or undiscounted operating cash flows whenever significant events or changes occur which might impair recovery of recorded costs. Fully amortized goodwill and other intangible assets and the related accumulated amortization are removed from the accounts.

    Impairment is measured in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" and is based on whether the asset will be held and used or held for disposal. An impairment loss on assets to be held and used is measured as the amount by which the carrying amount exceeds the fair value of the asset. Fair value of assets held for disposal would additionally be reduced by costs to sell the asset. For the purposes of analyzing impairment, assets, including goodwill, are grouped at the lowest level for which there are identifiable independent cash flows, which is generally at the operating subsidiary level. Estimates of fair value are determined using various techniques depending on the event that indicated potential impairment (see Note 15). Impairment charges for goodwill in 1999 and 1998 amounted to $4.7 million and $30.0 million, respectively (see Note 15).

    Goodwill and other intangible assets consisted of the following at December 31, 2000 (amounts in thousands):

	Cost		Accumulated Amortization		Net Balance		Amortization Period
Goodwill	$	972,707	$	181,509	$	791,198	9–40 years
Provider network		69,466		18,992		50,474	14–40 years
Employer group contracts		92,900		77,024		15,876	11–23 years
Other		27,002		21,131		5,871	5–7 years
Total	$	1,162,075	$	298,656	$	863,419

    Goodwill and other intangible assets consisted of the following at December 31, 1999 (amounts in thousands):

	Cost		Accumulated Amortization		Net Balance		Amortization Period
Goodwill	$	981,600	$	157,924	$	823,676	9-40 years
Provider network		69,466		15,515		53,951	14-40 years
Employer group contracts		92,900		68,874		24,026	11-23 years
Other		27,002		19,069		7,933	5-7 years
Total	$	1,170,968	$	261,382	$	909,586

CHANGE IN ACCOUNTING PRINCIPLE

Effective January 1, 1999, the Company adopted Statement of Position 98-5 "Reporting on the Costs of Start-up Activities" and changed its method of accounting for start-up and organization costs. The change involved expensing these costs as incurred, rather than the Company's previous accounting principle of capitalizing and subsequently amortizing such costs.

    The change in accounting principle resulted in the write-off of the costs capitalized as of January 1, 1999. The cumulative effect of the write-off was $5.4 million (net of tax benefit of $3.7 million) and has been expensed and reflected in the consolidated statement of operations for the year ended December 31, 1999.

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CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, investments and premiums receivable. All cash equivalents and investments are managed within established guidelines which limit the amounts which may be invested with one issuer. Concentrations of credit risk with respect to premiums receivable are limited due to the large number of payers comprising the Company's customer base. The Company's 10 largest employer groups accounted for 36% and 32% of premiums receivable and 16% and 15% of premium revenue as of December 31, 2000 and 1999, respectively, and for the years then ended.

EARNINGS PER SHARE

The Company adopted in 1997, SFAS No. 128, "Earnings Per Share." As required by SFAS No. 128, basic EPS excludes dilution and reflects income divided by the weighted average shares of common stock outstanding during the periods presented. Diluted EPS is based upon the weighted average shares of common stock and dilutive common stock equivalents (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; in 2000 and 1999, this amounted to 982,000 and 54,000 shares. Such shares amounting to 207,000 were antidilutive in 1998.

    Options to purchase an aggregate of 4.6 million, 11.4 million, and 13.4 million shares of common stock during 2000, 1999, and 1998, respectively, were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common stock. These options expire through December 2010.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principal areas requiring the use of estimates include the determination of allowances for doubtful accounts, reserves for claims and other settlements, reserves for professional and general liabilities, amounts receivable or payable under government contracts, remaining reserves for restructuring and other charges, and net realizable values for assets where impairment charges have been recorded.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value amounts of cash equivalents, investments available for sale, trade accounts and notes receivable and notes payable approximate their carrying amounts in the financial statements and have been determined by the Company using available market information and appropriate valuation methodologies. The carrying amounts of cash equivalents approximate fair value due to the short maturity of those instruments. The fair values of investments are estimated based on quoted market prices and dealer quotes for similar investments. The fair value of notes payable is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt with the same remaining maturities. The carrying value of long-term notes receivable approximates the fair value of such receivables. Considerable judgment is required to develop estimates of fair value. Accordingly, the estimates are not necessarily indicative of the amounts the Company could have realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

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    The fair value estimates are based on pertinent information available to management as of December 31, 2000 and 1999. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly.

STOCK-BASED COMPENSATION

The Financial Accounting Standards Board ("FASB") issued SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). As permitted under SFAS 123, the Company has elected to continue accounting for stock-based compensation under the intrinsic value method prescribed in APB Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic value method, compensation cost for stock options is measured at the date of grant as the excess, if any, of the quoted market price of the Company's stock over the exercise price of the option (see Note 7).

    In March 2000, the FASB issued Interpretation No. 44, ("Interpretation 44") "Accounting for Certain Transactions Involving Stock Compensation." Interpretation 44 provides guidance on certain implementation issues related to APB Opinion No. 25. Interpretation 44 was effective July 1, 2000 and did not have an impact on the Company's consolidated financial position or results of operations.

COMPREHENSIVE INCOME

Effective January 1, 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and presenting comprehensive income and its components. Comprehensive income includes all changes in stockholders' equity (except those arising from transactions with stockholders) and includes net income and net unrealized appreciation (depreciation), after tax, on investments available for sale. Reclassification adjustments for net (losses) gains realized in net income were $(0.04) million, $0.4 million, and $2.0 million for the years ended December 31, 2000, 1999, 1998, respectively. See Consolidated Statements of Stockholders' Equity.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which is required to be adopted in fiscal years beginning after June 15, 2000. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Investments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133" which delayed the adoption of SFAS 133 until January 1, 2001. The Company has completed its assessment of the impact of SFAS 133, as amended, and has concluded that the adoption of SFAS 133 will not have a material impact on its financial condition or results of operations.

TAXES BASED ON PREMIUMS

The Company provides services in certain states which require premium taxes to be paid by the Company based on membership or billed premiums. These taxes are paid in lieu of or in addition to state income taxes and totaled $9.9 million in 2000, $11.7 million in 1999 and $13.9 million in 1998. These amounts are recorded in selling, general and administrative expenses on the Company's consolidated statements of operations.

INCOME TAXES

The Company records deferred tax assets and liabilities based on differences between the book and tax bases of assets and liabilities. The deferred tax assets and liabilities are calculated by applying enacted tax rates and laws to taxable years in which such differences are expected to reverse (see Note 10).

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NOTE 3—ACQUISITIONS AND DISPOSITIONS

The following summarizes acquisitions, strategic investments, and dispositions by the Company during the three years ended December 31, 2000.

2000 TRANSACTIONS

The Company sold a property in California and received cash proceeds of $3.5 million and recognized a gain of $1.1 million, before taxes.

    As discussed in the "1999 TRANSACTIONS," the Company completed the sale of its HMO operations in Washington. As part of the final sales true-up adjustment, the Company recorded a loss on the sale of its Washington HMO operations of $1.5 million, before taxes.

    In 1995, the Company entered into a five year tax retention operating lease for the construction of various health care centers and a corporate facility. Upon expiration in May 2000, the lease was extended for four months through September 2000 whereupon the Company settled its obligations under the agreement and purchased the leased properties which were comprised of three rental health care centers and a corporate facility for $35.4 million. The health care centers are held as investment rental properties and are included in other noncurrent assets. The corporate facility building is used in operations and included in property and equipment. The buildings are being depreciated over a remaining useful life of 35 years.

    Throughout 2000 and the first quarter of 2001, the Company has provided funding in the amount of approximately $4.2 million in MedUnite, Inc., an independent company, funded and organized by seven major managed health care companies. MedUnite, Inc. is designed to provide on-line internet provider connectivity services including eligibility information, referrals, authorizations, claims submission and payment. The funded amounts are included in other noncurrent assets.

    During 2000, the Company secured an exclusive e-business connectivity services contract from the Connecticut State Medical Society IPA, Inc. ("CSMS-IPA") for $15.0 million. CSMS-IPA is an association of medical doctors providing health care primarily in Connecticut. The amounts paid to CSMS-IPA for this agreement are included in other noncurrent assets.

1999 TRANSACTIONS

In connection with its planned divestiture of non-core operations, the Company completed the sale of certain of its non-affiliate pharmacy benefits management operations for net cash proceeds of $65.0 million and recognized a net gain of $60.6 million. In addition, the Company also completed the sale of its HMO operations in Utah, Washington, New Mexico, Louisiana, Texas and Oklahoma, as well as the sale of its two hospitals, a third-party administrator subsidiary and a PPO network subsidiary. For these businesses, the Company received an aggregate of $60.5 million in net cash proceeds, $12.2 million in notes receivable, $10.7 million in stocks and recognized a net loss of $9.1 million, before taxes. See Note 15 for impairment charges recognized during 1998 on certain of these dispositions.

    In connection with the disposition of the HMO operations in Washington, the Company sold the Medicaid and Basic Health Plan membership and retained under a reinsurance and administrative agreement the commercial membership. At the same time, the Company entered into definitive agreements with PacifiCare of Washington, Inc. and Premera Blue Cross to transition the Company's commercial membership in Washington. The transition was completed as of June 30, 2000. The Company also entered into a definitive agreement with PacifiCare of Colorado, Inc. to transition the Company's HMO membership in Colorado. The transition was completed as of June 30, 2000. The dispositions do not have a material effect on the consolidated financial statements.

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1998 TRANSACTIONS

CALL CENTER OPERATIONS—In December 1998, the Company sold certain of its call center operations for $36.3 million in cash, net of transaction costs, and recorded a gain of $1.2 million. In addition, the Company entered into a long-term services agreement with the buyer to provide such services to its members for a period of 10 years.

WORKERS' COMPENSATION—In December 1997, the Company adopted a formal plan to sell its workers' compensation segment which was accounted for as discontinued operations. On December 10, 1998, the Company completed the sale of the workers' compensation segment. The net assets sold consisted primarily of investments, premiums and reinsurance receivables, and reserves for claims. The selling price was $257.1 million in cash.

    In December 1997, the Company estimated that the loss on the disposal of the workers' compensation segment would approximate $99.0 million (net of income tax benefit of $21.0 million) which included an anticipated loss from operations during the phase-out period from December 1997 through the date of disposal. The pre-tax loss in 1998 was an additional $30.2 million. This was offset by an increase in the rate of the tax benefit of the transaction. Accordingly, the accompanying statement of operations for the year ended December 31, 1998 does not reflect any additional net gain or loss from the disposition.

NOTE 4—INVESTMENTS

As of December 31, the amortized cost, gross unrealized holding gains and losses and fair value of the Company's available-for-sale investments were as follows (amounts in thousands):

	2000
	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Carrying Value
Asset-backed securities	$	108,308	$	564	$	(149	)	$	108,723
U.S. government and agencies		78,953		436		(100	)		79,289
Obligations of states and other political subdivisions		103,168		506		(80	)		103,594
Corporate debt securities		90,525		555		(3,186	)		87,894
Other securities		110,864		750		(4,212	)		107,402
	$	491,818	$	2,811	$	(7,727	)	$	486,902

	1999
	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Carrying Value
Asset-backed securities	$	116,628	$	5	$	(1,600	)	$	115,033
U.S. government and agencies		98,998		13		(1,645	)		97,366
Obligations of states and other political subdivisions		138,830		10		(833	)		138,007
Corporate debt securities		69,602		8		(1,209	)		68,401
Other securities		37,808		8		(20	)		37,796
	$	461,866	$	44	$	(5,307	)	$	456,603

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    At December 31, 2000, the contractual maturities of the Company's available-for-sale investments were as follows (amounts in thousands):

	Cost		Estimated Fair Value
Due in one year or less	$	130,068	$	125,770
Due after one year through five years		241,087		239,947
Due after five years through ten years		54,116		54,336
Due after ten years		66,547		66,849
Total available for sale	$	491,818	$	486,902

    Proceeds from sales and maturities of investments available for sale during 2000 were $304.5 million, resulting in realized gains and losses of $.04 million and $.1 million, respectively. Proceeds from sales and maturities of investments available for sale during 1999 were $642.2 million, resulting in realized gains and losses of $.7 million and $.1 million, respectively. Proceeds from sales and maturities of investments available for sale during 1998 were $727.4 million, resulting in realized gains and losses of $3.6 million and $0.3 million, respectively.

NOTE 5—PROPERTY AND EQUIPMENT

Property and equipment comprised the following at December 31 (amounts in thousands):

	2000		1999
Land	$	20,700	$	20,645
Construction in progress		2,082		18,930
Buildings and improvements		126,702		111,936
Furniture, equipment and software		541,654		473,042
		691,138		624,553
Less accumulated depreciation		395,129		343,824
	$	296,009	$	280,729

NOTE 6—NOTES PAYABLE, CAPITAL LEASES AND OTHER FINANCING ARRANGEMENTS

Notes payable, capital leases and other financing arrangements comprised the following at December 31 (amounts in thousands):

	2000		1999
Revolving credit facility, variable interest at LIBOR plus 1.50% at December 31, 2000, unsecured	$	766,450	$	1,039,250
Capital leases and other notes payable		49		1,358
Total notes payable and capital leases		766,499		1,040,608
Notes payable and capital leases—current portion		49		1,256
Notes payable and capital leases—noncurrent portion	$	766,450	$	1,039,352

REVOLVING CREDIT FACILITY

The Company established in July 1997, a $1.5 billion credit facility (the "Credit Facility") with Bank of America (as Administrative Agent for the Lenders thereto, as amended in April, July, and November 1998, March 1999, and September 2000 (the "Amendments")). All previous revolving credit facilities were terminated and rolled into the Credit Facility. 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. These rates were 7.56% and 7.19% at

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December 31, 2000 and 1999, respectively. Under the Amendments, the Company's public issuer rating becomes the exclusive means of setting the facility fee and borrowing rates under the Credit Facility. In addition, certain covenants including financial covenants were amended. The Credit Facility is available for five years, until July 2002, but it may be extended under certain circumstances for two additional years. The weighted average annual interest rate on the Company's notes payable and capital leases was approximately 7.92%, 6.78% and 6.30% for the years ended December 31, 2000, 1999 and 1998, respectively. The maximum amount outstanding under the Credit Facility during 2000 was $1.1 billion and the maximum commitment level is $1.36 billion at December 31, 2000.

    As of December 31, 2000, the Company was in compliance with the financial covenants of the Credit Facility, as amended.

    Scheduled principal repayments on notes payable, capital leases and other financing arrangements are $49,000 in 2001 and $766.5 million in 2002. No principal repayments are scheduled after 2002.

NOTE 7—STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS

The Company has various stock option plans which cover certain employees, officers and non-employee directors, and an employee stock purchase plan under which substantially all full-time employees of the Company are eligible to participate. The stockholders have approved these plans except for the 1998 Stock Option Plan which was adopted by the Company's Board of Directors.

    Under the 1989, 1990, 1991, 1992, 1993, 1997 and 1998 employee stock option plans and the non-employee director stock option plan, the Company grants options at prices at or above the fair market value of the stock on the date of grant. The options carry a maximum term of up to 10 years and in general vest ratably over three to five years. The Company has reserved a total of 23.3 million shares of its Class A Common Stock for issuance under the stock option plans.

    Under the Company's Employee Stock Purchase Plan, the Company provides employees with the opportunity to purchase stock through payroll deductions. Eligible employees may purchase on a monthly basis the Company's Class A Common Stock at 85% of the lower of the market price on either the first or last day of each month.

    Stock option activity and weighted average exercise prices for the years ended December 31 are presented below:

	2000				1999				1998
	Number of Options		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price
Outstanding at January 1	12,284,417		$	20.47	13,418,473		$	20.87	9,636,831		$	29.94
Granted	3,932,353			9.54	785,549			12.62	8,021,018			14.05
Exercised	(314,384	)		17.73	(5,000	)		14.50	(514,064	)		18.64
Canceled	(3,682,604	)		17.86	(1,914,605	)		19.93	(3,725,312	)		30.28
Outstanding at December 31	12,219,782		$	17.83	12,284,417		$	20.47	13,418,473		$	20.87
Exercisable at December 31	4,890,364				4,824,708				4,140,362

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    The following table summarizes the weighted average exercise price and weighted average remaining contractual life for significant option groups outstanding at December 31, 2000:

Options Outstanding						Options Exercisable
Range of Exercise Prices		Number of Options	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number of Options	Weighted Average Exercise Price
$	6.63–9.81	3,360,601	7.58	$	9.03	40,669	$	9.00
	9.88–10.84	259,500	8.11		10.52	185,165		10.67
	11.19–12.94	3,935,409	4.23		12.86	560,259		12.82
	13.00–31.91	2,038,939	5.68		22.54	1,501,438		24.44
	32.13–44.06	2,625,333	6.29		33.62	2,602,833		33.63
$	6.63–44.06	12,219,782	5.92	$	17.83	4,890,364		27.35

    The weighted average fair value for options granted during 2000, 1999 and 1998 was $5.18, $6.10 and $6.00, respectively. The fair values were estimated using the Black-Scholes option-pricing model. The following weighted average assumptions were used in the fair value calculation for 2000, 1999 and 1998, respectively: (i) risk-free interest rate of 5.97%, 6.31% and 4.57%; (ii) expected option lives of 4.2 years, 3.9 years and 4.6 years; (iii) expected volatility for both options and employee purchase rights of 63.7%, 55.7% and 44.5%; and (iv) no expected dividend yield.

    The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option or employee stock purchase plans. Had compensation cost for the Company's plans been determined based on the fair value at the grant dates of options and employee purchase rights consistent with the method of SFAS No. 123, the Company's net income (loss) and earnings (losses) per share would have been reduced (increased) to the pro forma amounts indicated below for the years ended December 31 (amounts in thousands, except per share data):

		2000	1999		1998
Net income (loss)	As reported	$163,623	$	142,365	$	(165,158	)
	Pro forma	156,701		132,043		(171,022	)
Basic earnings (loss) per share	As reported	1.34		1.16		(1.35	)
	Pro forma	1.28		1.08		(1.40	)
Diluted earnings (loss) per share	As reported	1.33		1.16		(1.35	)
	Pro forma	1.27		1.08		(1.40	)

    On December 4, 1998, options representing approximately 1.9 million shares of stock granted during 1990 through 1997 at exercise prices ranging from $11.70 to $35.25 were exchanged for options representing approximately 1.4 million shares of stock at an exercise price of $12.94, which was the fair market value of the underlying shares on the grant date.

    As fair value criteria was not applied to option grants and employee purchase rights prior to 1995, and additional awards in future years are anticipated, the effects on net income and earnings per share in this pro forma disclosure may not be indicative of future amounts.

NOTE 8—CAPITAL STOCK

The Company has two classes of Common Stock. The Company's Class B Common Stock has the same economic benefits as the Company's Class A Common Stock but is non-voting. As of December 31, 2000 there were 122,800,000 shares of the Company's Class A Common Stock outstanding and no shares of the Company's Class B Common Stock outstanding.

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PUBLIC OFFERING

On May 15, 1996, the Company completed a public offering in which the Company sold 3,194,374 shares of Class A Common Stock and the California Wellness Foundation ("CWF") sold 6,386,510 shares of Class A Common Stock (constituting 6,386,510 shares of Class B Common Stock which automatically converted into shares of Class A Common Stock upon the sale) for a per share purchase price to the public of $30.00 (the "Offering"). The proceeds received by the Company from the sale of the 3,194,374 shares of Class A Common Stock were approximately $92.4 million after deducting underwriting discounts and commissions and estimated expenses of the Offering payable by the Company. The Company used its net proceeds from the Offering to repurchase 3,194,374 shares of Class A Common Stock from certain Class A Stockholders. The Company repurchased these shares of Class A Common Stock from the Class A Stockholders at $30.00 per share less transaction costs associated with the Offering, amounting to $1.08 per share. All of these 3,194,374 shares of Class A Common Stock repurchased are currently held in treasury. The Company did not receive any of the proceeds from the sale of shares of Class A Common Stock in the Offering by the CWF.

    On June 27, 1997, the Company redeemed 4,550,000 shares of Class B Common Stock from the CWF at a price of $24.469 per share. The Company provided its consent to permit the CWF to sell 3,000,000 shares of Class B Common Stock to an unrelated third party in June of 1997 and the CWF had the right to sell an additional 450,000 shares of Class B Common Stock to unrelated third parties, which it did throughout August of 1997. On November 6, 1997, the Company also provided its consent to permit the CWF to sell 1,000,000 shares of Class B Common Stock to unrelated third parties. In addition, on June 1, 1998, the Company gave its consent to permit the CWF to sell (and on June 18, 1998, the CWF sold) 5,250,000 shares of Class B Common Stock to unrelated third parties. In 2000 and 1999, the CWF sold 2,138,000 and 2,909,600 shares of Class B Common Stock to unrelated third parties, respectively. As a result of such sale, the CWF no longer holds any shares of Class B Common Stock. Pursuant to the Company's Certificate of Incorporation, all of such shares of Class B Common Stock sold automatically converted into shares of Class A Common Stock in the hands of such third parties.

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," the Rights separate from the Common Stock under the circumstances described below and in accordance with the provisions of the Rights Agreement, 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 (as amended), the Rights will separate from the Common Stock following any person, together with its affiliates and associates (an "Acquiring Person"), becoming the beneficial owner of 15% or more of the outstanding Class A Common Stock, the commencement of a tender or exchange offer that would result in any person, together with its affiliates and associates, becoming the beneficial owner of 15% or more of the outstanding Class A Common Stock or the determination by the Board of Directors that a person, together with its affiliates and associates, has become the beneficial owner of 10% or more of the Class A Common Stock and that such person is an "Adverse Person," as defined in the Rights Agreement.

    The Rights will first become exercisable on the Distribution Date and will expire on July 31, 2006, unless earlier redeemed by the Company as described below. Except as set forth below and subject to

36

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.

    Subject to certain exceptions contained in the Rights Agreement, in the event that any person shall become an Acquiring Person or be declared an Adverse Person, then the Rights will "flip-in" and entitle each holder of a Right, other than any Acquiring Person or Adverse Person, to purchase, upon exercise at the then-current exercise price of such Right, that number of shares of Class A Common Stock having a market value of two times such exercise price.

    In addition and subject to certain exceptions contained in the Rights Agreement, in the event that the Company is acquired in a merger or other business combination in which the Class A Common Stock does not remain outstanding or is changed or 50% of the assets or earning power of the Company is sold or otherwise transferred to any other person, the Rights will "flip-over" and entitle each holder of a Right, other than an Acquiring Person or an Adverse Person, to purchase, upon exercise at the then-current exercise price of such Right, that number of shares of common stock of the acquiring company which at the time of such transaction would have a market value of two times such exercise price.

    The Company may redeem the rights until the earlier of 10 days following the date that any person becomes the beneficial owner of 15% or more of the outstanding Class A Common Stock and the date the Rights expire at a price of $.01 per Right.

    In connection with the FHS Combination, the Company entered into Amendment No. 1 to the Rights Agreement to exempt the FHS Combination and related transactions from triggering the separation of the Rights. In addition, the amendment modified certain terms of the Rights Agreement applicable to the determination of certain "Adverse Persons," which modifications became effective upon consummation of the FHS Combination.

NOTE 9—EMPLOYEE BENEFIT PLANS

DEFINED CONTRIBUTION RETIREMENT PLANS

The Company and certain subsidiaries sponsor defined contribution retirement plans intended to qualify under Section 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"). Participation in the plans is available to substantially all employees who meet certain eligibility requirements and elect to participate. Employees may contribute up to the maximum limits allowed by Sections 401(k) and 415 of the Code, with Company contributions based on matching or other formulas. The Company's expense under these plans totaled $8.6 million, $7.8 million and $7.4 million for the years ended December 31, 2000, 1999 and 1998, respectively.

DEFERRED COMPENSATION PLANS

Effective May 1, 1998, the Company adopted a deferred compensation plan pursuant to which certain management and highly compensated employees are eligible to defer between 5% and 50% of their regular compensation and between 5% and 100% of their bonuses, and non-employee Board members are eligible to defer up to 100% of their directors compensation. The compensation deferred under this plan is credited with earnings or losses measured by the mirrored rate of return on investments elected by plan participants. Each plan participant is fully vested in all deferred compensation and earnings credited to his or her account. At December 31, 2000, the employee deferrals were invested through a trust.

    Prior to May 1997, certain members of management, highly compensated employees and non-employee Board members were permitted to defer payment of up to 90% of their compensation under a prior deferred compensation plan (the "Prior Plan"). The Prior Plan was frozen in May 1997

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at which time each participant's account was credited with three times the 1996 Company match (or a lesser amount for certain participants) and each participant became 100% vested in all such contributions. The current provisions with respect to the form and timing of payments under the Prior Plan remain unchanged. At December 31, 2000 and 1999, the liability under these plans amounted to $21.6 million and $20.9 million, respectively. The Company's expense under these plans totaled $2.8 million, $1.9 million and $2.7 million for the years ended December 31, 2000, 1999 and 1998, respectively.

PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

RETIREMENT PLANS—The Company has two unfunded non-qualified defined benefit pension plans, a Supplemental Executive Retirement Plan (adopted in 1996) and a Directors' Retirement Plan (collectively, the "HSI SERPs"). These plans cover key executives, as selected by the Board of Directors, and non-employee directors. Benefits under the plans are based on years of service and level of compensation.

POSTRETIREMENT HEALTH AND LIFE PLANS—Certain subsidiaries of the Company sponsor postretirement defined benefit health care plans that provide postretirement medical benefits to directors, key executives, employees and dependents who meet certain eligibility requirements. Under these plans, the Company pays a percentage of the costs of medical, dental and vision benefits during retirement. The plans include certain cost-sharing features such as deductibles, co-insurance and maximum annual benefit amounts which vary based principally on years of credited service.

    On December 31, 1998, the Company adopted SFAS No. 132 "Employers' Disclosures about Pension and Other Postretirement Benefits" ("SFAS No. 132"), which revises employers' disclosures about pension and other postretirement benefit plans. SFAS No. 132 standardizes the disclosure requirements. The Company has chosen to disclose the information required by SFAS No. 132 by aggregating retirement plans into the "Pension Benefits" category and postretirement plans into the "Other Benefits" category.

    The following table sets forth the plans' funded status and amounts recognized in the Company's financial statements (amounts in thousands):

		Pension Benefits						Other Benefits
		2000			1999			2000			1999
Change in benefit obligation:
	Benefit obligation, beginning of year	$	12,287		$	15,103		$	5,506		$	4,060
	Service cost		1,174			1,762			595			603
	Interest cost		972			989			388			324
	Benefits paid		(967	)		(1,112	)		(95	)		(94	)
	Actuarial loss (gain)		708			(4,455	)		52			613
	Projected benefit obligation, end of year	$	14,174		$	12,287		$	6,446		$	5,506
Change in fair value of plan assets:
	Plan assets, beginning of year	$	—		$	—		$	—		$	—
	Employer contribution		967			1,112			24			21
	Benefits paid		(967	)		(1,112	)		(24	)		(21	)
	Plan assets, end of year	$	—		$	—		$	—		$	—
	Funded status of plans	$	(14,174	)	$	(12,287	)	$	(6,446	)	$	(5,506	)
	Unrecognized prior service cost		4,499			4,969			(204	)		(211	)
	Unrecognized (gain)		(2,465	)		(3,338	)		(1,511	)		(1,645	)
	Net amount recognized as accrued benefit liability	$	(12,140	)	$	(10,656	)	$	(8,161	)	$	(7,362	)

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    The components of net periodic benefit costs for the years ended December 31, 2000, 1999 and 1998 are as follows (amounts in thousands):

	Pension Benefits							Other Benefits
	2000			1999		1998		2000			1999			1998
Service cost	$	1,174		$	1,762	$	1,525	$	595		$	603		$	356
Interest cost		972			989		756		388			324			252
Amortization of prior service cost		469			474		308		(6	)		(6	)		(8	)
Amortization of unrecognized (gain) loss		(165	)		103		72		(82	)		(58	)		(115	)
		2,450			3,328		2,661		895			863			485
Cost of subsidiary plan curtailment		—			—		1,896		—			—			(13	)
Net periodic benefit cost	$	2,450		$	3,328	$	4,557	$	895		$	863		$	472

    The weighted average annual discount rate assumed was 7.50% and 7.75% for the years ended December 31, 2000 and 1999, respectively, for both pension plan benefit plans and other postretirement benefit plans. Weighted average compensation increases of between 2.00% to 6.00% for the years ended December 31, 2000 and 1999 were assumed for the pension benefit plans.

    For measurement purposes, depending upon the type of coverage offered, a 6.00% to 9.00% annual rate of increase in the per capita cost covered health care benefits was assumed for 2000, and 6.00% was assumed for 1999. These rates were assumed to decrease gradually to between 5.50% and 6.00% in 2007 for 2000 and to 4.50% in 2006 for 1999.

    The Company has multiple postretirement medical benefit plans. The Health Net plan is non-contributory for employees retired prior to December 1, 1995 who have attained the age of 62; employees retiring after December 1, 1995 who have attained age 62 contribute from 25% to 100% of the cost of coverage depending upon years of service. The Company has two other benefit plans that it has acquired as part of the acquisitions made in 1997. One of the plans is frozen and non-contributory, whereas the other plan is contributory by certain participants.

    A one percentage point change in assumed health care cost trend rates would have the following effects for the year ended December 31, 2000 (amounts in thousands):

	1-percentage point increase		1-percentage point decrease
Effect on total of service and interest cost	$	258	$	(190	)
Effect on postretirement benefit obligation		1,333		(1,017	)

    The Company has no minimum pension liability adjustment to be included in comprehensive income.

PERFORMANCE-BASED ANNUAL BONUS PLAN

In 2000, the Company adopted a new Executive Officer Incentive Plan that qualifies as a Performance-Based Annual Bonus Plan that qualified under Section 162(m) of the Code (the "162(m) Plan"). Under the 162(m) Plan, certain executives were eligible to receive cash bonuses based upon the attainment of objective performance goals established by the Company's Compensation and Stock Option Committee pursuant to the terms of the 162(m) Plan.

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NOTE 10—INCOME TAXES

Significant components of the provision (benefit) for income taxes are as follows for the years ended December 31 (amounts in thousands):

		2000		1999			1998
Current:
	Federal	$	18,459	$	29,080		$	6,346
	State		10,349		(6,448	)		3,897
Total current			28,808		22,632			10,243
Deferred:
	Federal		64,644		52,419			(121,800	)
	State		5,672		21,175			(7,630	)
Total deferred			70,316		73,594			(129,430	)
Total provision (benefit) for income taxes		$	99,124	$	96,226		$	(119,187	)

    The $119.2 million tax benefit in 1998 includes $30,191,000 of tax benefit associated with the disposition of the Company's workers' compensation segment, which was recorded as a discontinued operation in 1997. The tax benefit offsets additional pretax losses recorded upon completion of the sale in December 1998.

    A reconciliation of the statutory federal income tax rate and the effective income tax rate on income from continuing operations is as follows for the years ended December 31:

	2000		1999		1998
Statutory federal income tax rate	35.0	%	35.0	%	(35.0	)%
State and local taxes, net of federal income tax effect	4.0		3.9		(1.5	)
Tax exempt interest income	(0.9	)	(1.1	)	(1.3	)
Goodwill amortization	3.3		3.4		5.7
Examination settlements	(2.3	)	(1.9	)	—
Merger transaction costs	—		—		(3.2	)
Other, net	(1.4	)	0.1		0.3
Effective income tax rate	37.7	%	39.4	%	(35.0	)%

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    Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows (amounts in thousands):

	2000			1999
DEFERRED TAX ASSETS:
Accrued liabilities	$	28,570		$	52,491
Insurance loss reserves and unearned premiums		4,627			6,144
Tax credit carryforwards		12,709			8,059
Accrued compensation and benefits		33,089			33,838
Restructuring reserves		—			4,025
Net operating loss carryforwards		115,462			165,023
Other		8,687			16,363
Deferred tax assets before valuation allowance		203,144			285,943
Valuation allowance		(16,813	)		(47,092	)
Net deferred tax assets	$	186,331		$	238,851
DEFERRED TAX LIABILITIES:
Depreciable and amortizable property	$	53,214		$	35,388
Other		—			50
Deferred tax liabilities	$	53,214		$	35,438

    In 2000 and 1998, income tax benefits attributable to employee stock option transactions of $0.5 million and $6.3 million, respectively, were allocated to stockholders' equity. No income tax benefits were allocated to stockholders' equity during 1999.

    As of December 31, 2000, the Company had federal and state net operating loss carryforwards of approximately $296.7 million and $232.5 million, respectively. The net operating loss carryforwards expire between 2001 and 2019. Limitations on utilization may apply to approximately $36.9 million and $80.7 million of the federal and state net operating loss carryforwards, respectively. Accordingly, valuation allowances have been provided to account for the potential limitations on utilization of these tax benefits. During the year ended December 31, 2000, the valuation allowance decreased by $30.3 million resulting from changes in realizability of an acquired subsidiary's deferred tax assets. The tax benefit reduced associated goodwill. Of the remaining valuation allowance, $14.9 million will also be allocated to goodwill in the event certain deferred tax assets are realized.

NOTE 11—REGULATORY REQUIREMENTS

All of the Company's health plans as well as its insurance subsidiaries are required to periodically file financial statements with regulatory agencies in accordance with statutory accounting and reporting practices. Under the California Knox-Keene Health Care Service Plan Act of 1975, as amended, California plans must comply with certain minimum capital or tangible net equity requirements. The Company's non-California health plans, as well as its health and life insurance companies, must comply with their respective state's minimum regulatory capital requirements and in certain cases, maintain minimum investment amounts for the restricted use of the regulators which as of December 31, 2000 totaled $7.2 million. Also, under certain government regulations, certain subsidiaries are required to maintain a current ratio of 1:1 and to meet other financial standards.

    As a result of the above requirements and other regulatory requirements, certain subsidiaries are subject to restrictions on their ability to make dividend payments, loans or other transfers of cash to the Company. Such restrictions, unless amended or waived, limit the use of any cash generated by these subsidiaries to pay obligations of the Company. The maximum amount of dividends which can be paid by the insurance company subsidiaries to the Company without prior approval of the insurance

41

departments is subject to restrictions relating to statutory surplus, statutory income and unassigned surplus. Management believes that as of December 31, 2000, all of the Company's health plans and insurance subsidiaries met their respective regulatory requirements.

NOTE 12—COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

     The Company and its former wholly-owned subsidiary, Foundation Health Corporation ("FHC"), were 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. 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. The parties are currently engaged in discovery. On January 1, 2001, FHC was merged into the Company. The Company intends to defend itself vigorously in this litigation.

    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. The Company intends to vigorously defend the actions.

    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, which became 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

42

$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. The Company has satisfied substantially all of the judgment with the exception of the amounts related to the interest awarded on the judgment, which the Company is appealing.

    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. The complaint seeks certification of a nationwide class action and alleges that cost containment measures used by the Company's 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. On June 23, 2000, the plaintiffs filed amended complaints in a Humana action that had been consolidated pursuant to the multi-district litigation statute in the Southern District of Florida to add claims against other managed care organizations, including the Company. On October 23, 2000, the court allowed the plaintiffs to further amend the complaint against the Company to add two new named plaintiffs and withdraw the originally named plaintiff, Kerrie Pay, from the action. Consequently, this case is now entitled Romero v. Foundation Health Systems, Inc. On October 23, 2000, the Judicial Panel on Multi-District Litigation ruled that the action originally filed against the Company in the Southern District of Mississippi should be consolidated, for purposes of pre-trial proceedings only, with other cases pending against managed care organizations in the United States District Court for the Southern District of Florida in Miami. The Company has filed a motion to dismiss the case. Briefing on the motion to dismiss has been completed and the matter is currently pending before the court. Preliminary discovery and briefing regarding the plaintiff's motion for class certification has also been completed and the matter is also pending before the court. The Company intends to vigorously defend the action.

    On August 17, 2000, a complaint was filed in the United States District Court for the Southern District of Florida in a lawsuit entitled Shane v. Humana, Inc., et al. (including Foundation Health Systems, Inc.). The complaint seeks certification of a nationwide class action on behalf of physicians and alleges that the defendant managed care companies' methods of reimbursing physicians violate provisions of the RICO, ERISA, certain federal regulations and various state laws. The action seeks unspecified damages and injunctive relief. On September 22, 2000, the Company filed a motion to dismiss, or in the alternative to compel arbitration. On December 11, 2000, the court granted in part and denied in part the Company's motion to compel arbitration. Under the court's order, the single named plaintiff to allege a direct contractual relationship with the Company is compelled to arbitrate his direct claims against the Company. The Company intends to vigorously defend the action.

    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. The State of Connecticut has filed an appeal.

43

    Meanwhile, on September 7, 2000, the Attorney General of Connecticut, Richard Blumenthal, filed another lawsuit against Physicians Health Services of Connecticut, Inc. ("PHS-CT"). This new suit also names Foundation Health Systems, Inc., Anthem Blue Cross and Blue Shield of CT, Anthem Health Plans, Inc., CIGNA Healthcare of CT, Inc., Oxford Health Plans of CT, Inc. as defendants, and asserts claims against PHS-CT and the Company that are similar, if not identical, to those asserted in the previous lawsuit that was dismissed on July 12, 2000. On November 30, 2000, the clerk of the Judicial Panel on Multi-District Litigation entered an order conditionally transferring this case to the United States District Court for the Southern District of Florida to be consolidated for pretrial proceedings only with the other cases against managed care organizations pending in that court. The clerk of the Judicial Panel on Multi-District Litigation stayed the conditional transfer order on December 15, 2000 pending briefing and argument concerning whether transfer is appropriate. The Connecticut District Court has stayed the case pending the outcome of the Judicial Panel on Multi-District Litigation proceedings. The Company intends to vigorously defend the action.

    On September 7, 2000, a complaint was filed in the United States District Court for the District of Connecticut in a lawsuit entitled Albert v. CIGNA Healthcare of Connecticut, Inc., et al. (including Physicians Health Services of Connecticut, Inc. and Foundation Health Systems, Inc.). The complaint seeks certification of a nationwide class action and alleges that the defendant managed care companies' various practices violate provisions of the federal Employee Retirement Income Security Act ("ERISA"). The action seeks unspecified damages and injunctive relief. On November 30, 2000, the clerk of the Judicial Panel on Multi-District Litigation entered an order conditionally transferring this case to the United States District Court for the Southern District of Florida to be consolidated for pretrial proceedings only with the other cases against managed care organizations pending in that court. The clerk of the Judicial Panel on Multi-District Litigation stayed the conditional transfer order on December 15, 2000 pending briefing and argument concerning whether transfer is appropriate. The plaintiff is objecting to transfer. The Company intends to vigorously defend 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 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. On October 23, 2000, the Judicial Panel on Multi-District Litigation ruled that this case should be consolidated, for purposes of pre-trial proceedings only, with other cases pending against managed care organizations in the United States District Court for the Southern District of Florida in Miami. The Company 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 results of operations or financial condition.

44

OPERATING LEASES

The Company leases administrative office space under various operating leases. Certain leases contain renewal options and rent escalation clauses.

    On September 30, 2000, Health Net of California, Inc. entered into an operating lease agreement to lease office space in Woodland Hills, California for substantially all of its operations once its current office lease expires. The new lease is anticipated to commence on January 1, 2002 for a term of 10 years. The total future minimum lease commitments under the lease are approximately $96.7 million.

    Future minimum lease commitments for noncancelable operating leases at December 31, 2000 are as follows (amounts in thousands):

2001		$	47,126
2002			40,764
2003			29,183
2004			22,915
2005			16,199
Thereafter			82,153
	Total minimum lease commitments	$	238,340

    Rent expense totaled $49.8 million, $49.0 million and $50.3 million in 2000, 1999 and 1998, respectively.

NOTE 13—RELATED PARTIES

One current director of the Company was a partner in a law firm which received legal fees totaling $0.3 million, $1.2 million, and $1.0 million, in 2000, 1999, and 1998, respectively. Such law firm is also an employer group of the Company from which the Company receives premium revenues at standard rates. One current director was an officer of IBM which the Company paid $16.7 million, $9.0 million and $8.0 million for products and services in 2000, 1999 and 1998, respectively, and one current director is also a director of a temporary staffing company which the Company paid $1.9 million, $11.0 million and $20.4 million in 2000, 1999 and 1998, respectively.

    A director of the Company was paid $70,000, and $25,000 in consulting fees in 2000 and 1999, respectively, due to various services provided to the Company in connection with the closing of its operations in Pueblo, Colorado (see Note 15). In addition, two of this director's law firm partners purchased a building from the Company in Pueblo, Colorado, for $405,000 in 1999.

    During 1998, three executive officers of the Company, in connection with their hire or relocation, received one-time loans from the Company aggregating $775,000 which ranged from $125,000 to $400,000 each. The loans accrue interest at the prime rate and each is payable upon demand by the Company in the event of a voluntary termination of employment of the respective officer or termination for cause. During 1999, three executive officers of the Company, in connection with their hire or relocation, received one-time loans from the Company aggregating $550,000 which ranged from $100,000 to $300,000 each. The loans accrue interest at the prime rate and each is payable upon demand by the Company in the event of a voluntary termination of employment of the respective officer or termination for cause.

    The principal and interest of the loans will be forgiven by the Company at varying times between one and five years after the date of hire or relocation of the respective officers. As of December 31, 2000, the aggregate outstanding principal balance of the six loans was $648,334.

45

NOTE 14—ASSET IMPAIRMENT, MERGER, RESTRUCTURING AND OTHER COSTS

The following sets forth the principal components of asset impairment, merger, restructuring and other costs for the years ended December 31 (amounts in millions):

	2000		1999			1998
Severance and benefit related costs	$	—	$	17.2		$	21.2
Real estate lease termination costs		—		0.8			—
Asset impairments and other charges related to FPA Medical Management		—		—			84.1
Asset impairment and other costs		—		6.2			112.4
Other costs		—		1.7			22.4
		—		25.9			240.1
Modifications to prior year restructuring plans		—		(14.2	)		—
Total	$	—	$	11.7		$	240.1

1999 CHARGES

The following tables summarize the 1999 charges by quarter and by type (amounts in millions):

								1999 Activity
	1999 Charges		1999 Modifications to Estimate			Net 1999 Charges		Cash Payments			Non-Cash			Balance at December 31, 1999
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

	Balance at December 31, 1999		2000 Cash Payments			Balance at December 31, 2000		Expected Future Cash Outlays
Severance and benefit related costs	$	8.6	$	(8.6	)	$	—	$	—
Asset impairment costs		—		—			—		—
Real estate lease termination costs		—		—			—		—
Other costs		0.3		(0.3	)		—		—
Total	$	8.9	$	(8.9	)	$	—	$	—
First Quarter 1999 Charge	$	8.9	$	(8.9	)	$	—	$	—
Fourth Quarter 1999 Charge		—		—			—		—
Total	$	8.9	$	(8.9	)	$	—	$	—

    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 in 1999 its plan to close the Colorado regional processing center, terminate employees and transfer its operations to the Company's other administrative facilities. In addition, the Company also announced its plans to consolidate certain administrative functions in its Oregon and Washington health

46

plan operations. During the year ended December 31, 1999, the Company recorded pretax charges for restructuring and other charges of $21.1 million (the "1999 Charges") and $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 Northwest 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 December 31, 2000, termination of the employees was completed and $17.2 million had been paid. There are no expected future cash outlays. Modifications to the initial estimate of $1.3 million were recorded during the year ended December 31, 1999.

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 (see Note 15).

REAL ESTATE LEASE TERMINATION AND OTHER COSTS—The 1999 Charges included $2.6 million related to termination of real estate obligations and other costs to close the Colorado regional processing center.

    The 1999 restructuring plan was completed as of December 31, 2000.

1998 CHARGES

The following tables summarize the 1998 charges by quarter and by type (amounts in millions):

	Activity during 1998 and 1999													2000 Activity
	1998 Charges		Cash Payments			Non-Cash			1999 Modifications to Estimate			Balance at Dec. 31, 1999		Cash Payments			Balance at Dec. 31, 2000		Expected Future Cash Outlays
Severance and benefit related costs	$	21.2	$	(18.2	)	$	(1.9	)	$	(1.0	)	$	0.1	$	(0.1	)	$	—	$	—
Asset impairment and other charges related to FPA		84.1		(16.6	)		(66.9	)		(0.6	)		—		—			—		—
Asset impairment and other		112.4		(0.8	)		(100.9	)		(10.7	)		—		—			—		—
Other costs		22.4		(3.5	)		(18.6	)		(0.3	)		—		—			—		—
Total	$	240.1	$	(39.1	)	$	(188.3	)	$	(12.6	)	$	0.1	$	(0.1	)	$	—	$	—
Second Quarter 1998 Charge	$	50.0	$	(8.9	)	$	(41.1	)	$	—		$	—	$	—		$	—	$	—
Third Quarter 1998 Charge		71.7		(23.7	)		(46.0	)		(1.9	)		0.1		(0.1	)		—		—
Fourth Quarter 1998 Charge		118.4		(6.5	)		(101.2	)		(10.7	)		—		—			—		—
Total	$	240.1	$	(39.1	)	$	(188.3	)	$	(12.6	)	$	0.1	$	(0.1	)	$	—	$	—

SEVERANCE AND BENEFIT RELATED COSTS—During the year ended December 31, 1998, the Company recorded severance costs of $21.2 million related to staff reductions in selected health plans and the corporate centralization and consolidation. This plan included the termination of 683 employees in seven geographic locations primarily relating to corporate finance and human resources functions and California operations. As of December 31, 1999, the termination of employees had been completed and $20.1 million had been recorded as severance under this plan.

FPA MEDICAL MANAGEMENT—On July 19, 1998, FPA Medical Management, Inc. ("FPA") filed for bankruptcy protection under Chapter 11 of the Federal Bankruptcy Code. FPA, through its affiliated medical groups, provided services to approximately 190,000 of the Company's affiliated members in Arizona and California and also leased health care facilities from the Company. FPA has

47

discontinued its medical group operations in these markets and the Company has made other arrangements for health care services to the Company's affiliated members. The FPA bankruptcy and related events and circumstances caused management to re-evaluate the decision to continue to operate the facilities and management determined to sell the 14 properties, subject to bankruptcy court approval. Management immediately commenced the sale process upon such determination. The estimated fair value of the assets held for disposal was determined based on the estimated sales prices less the related costs to sell the assets. Management believed that the net proceeds from a sale of the facilities would be inadequate to enable the Company to recover their carrying value. Based on management's best estimate of the net realizable values, the Company recorded charges totaling approximately $84.1 million. These charges were comprised of $63.0 million for real estate asset impairments, $10.0 million impairment adjustment of a note received as consideration in connection with the 1996 sale of the Company's physician practice management business and $11.1 million for other items. These other items included payments made to Arizona physician specialists totaling $3.4 million for certain obligations that FPA had assumed but was unable to pay due to its bankruptcy, advances to FPA to fund certain operating expenses totaling $3.0 million, and other various costs totaling $4.7 million. The carrying value of the assets held for disposal totaled $9.9 million at December 31, 2000. There have been no further adjustments to the carrying value of these assets held for disposal. As of December 31, 2000, 12 properties have been sold which has resulted in net gains of $5.0 million during 1999 and $3.6 million in 1998 which are included in net gains on sale of businesses and buildings. The remaining properties are expected to be sold during 2001. The effects of the suspension of real estate depreciation on the respective properties had an impact of approximately $2.0 million in 1998 and were immaterial during 2000 and 1999. The results of operations attributable to FPA real estate assets were immaterial during 1998, 1999 and 2000.

ASSET IMPAIRMENT AND OTHER CHARGES—During the fourth quarter ended December 31, 1998, the Company recorded impairment and other charges totaling $118.4 million. Of this amount, $112.4 million related to impairment of certain long-lived assets held for disposal (see Note 15) and $6 million related to the FPA bankruptcy.

OTHER COSTS—The Company recorded other costs of $22.4 million which included the adjustment of amounts due from a third-party hospital system that filed for bankruptcy which were not related to the normal business of the Company totaling $18.6 million, and $3.8 million related to other items such as fees for consulting services from one of the Company's prior executives and costs related to exiting certain rural Medicare markets.

    During 1999, modifications of $12.6 million to the initial estimates were recorded. These credits to the 1998 charges included: $10.7 million from reductions to asset impairment costs and $1.9 million from reductions to initially anticipated involuntary severance costs and other adjustments.

NOTE 15—IMPAIRMENT OF LONG-LIVED ASSETS

During 1998, the Company initiated a formal plan to dispose of certain Central Division health plans included in the Company's Health Plan Services segment in accordance with its previously disclosed anticipated divestitures program. Pursuant to SFAS No. 121, the Company evaluated the carrying values of the assets for these health plans and the related service center and holding company, and determined that the carrying value of these assets exceeded the estimated fair values of these assets. Estimated fair value is determined by the Company based on the current stages of sales negotiation, including letters of intent, definitive agreements, and sales discussions, net of expected transaction costs.

    In the case of the Colorado regional processing center and holding company operations, buildings, furniture, fixtures, equipment and software development projects were determined by management to

48

have no continuing value to the Company, due to the Company abandoning plans for the development of this location and its systems and programs as a centralized operations center.

    Accordingly, in the fourth quarter of 1998, the Company adjusted the carrying value of these long-lived assets to their estimated fair value, resulting in a non-cash asset impairment charge of approximately $112.4 million (see Note 14). This asset impairment charge of $112.4 million consists of $40.3 million for write-downs of abandoned furniture, equipment and software development projects; $20.9 million write-down of buildings and improvements; $30.0 million for write-down of goodwill; and $21.2 million for other impairments and other charges. The fair value is based on expected net realizable value. Revenue and pretax loss were $7.7 million and $0.4 million for the year ended December 31, 2000. Revenue and pretax income attributed to these Central Division plans were $191.3 million and $9.8 million for the year ended December 31, 1999, and revenue and pretax loss were $346.8 million and $36.1 million for the year ended December 31, 1998. The carrying value of these assets as of December 31, 2000, 1999, and 1998 was $3.9 million, $22.1 million, and $42.8 million, respectively. No subsequent adjustments were made to these assets in 1998, 1999 and 2000.

    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 $4.7 million reduction in the carrying value of the Company's Pittsburgh health plans to fair value. The Company also adjusted the carrying value of its subacute operations by $1.5 million to fair value. The revenue and pretax income attributable to these operations were $59.7 million and $1.3 million for the year ended December 31, 2000. Revenue and pretax losses attributable to these operations were $66.2 million and $1.4 million for the year ended December 31, 1999. The carrying value of these assets as of December 31, 2000, and 1999 was $14.5 million and $16.2 million, respectively.

NOTE 16—SEGMENT INFORMATION

As of December 31, 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes annual and interim reporting standards for an enterprise's reportable segments and related disclosures about its products, services, geographic areas and major customers. Under SFAS 131, reportable segments are to be defined on a basis consistent with reports used by management to assess performance and allocate resources. The Company's reportable segments are business units that offer different products to different classes of customers. The Company has two reportable segments: Health Plan Services and Government Contracts/Specialty Services. The Health Plan Services segment provides a comprehensive range of health care services through HMO and PPO networks. The Government Contracts/Specialty Services segment administers large, multi-year managed care government contracts and also offers behavioral, dental, vision, and pharmaceutical products and services.

    The Company evaluates performance and allocates resources based on profit or loss from operations before income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies, except intersegment transactions are not eliminated.

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    Presented below are segment data for the three years in the period ended December 31 (amounts in thousands):

2000	Health Plan		Government Contracts/ Specialty Services		Corporate and Other(i)			Total
Revenues from external sources	$	7,351,098	$	1,623,158	$	—		$	8,974,256
Intersegment revenues		—		67,325		—			67,325
Investment and other income		90,144		11,237		918			102,299
Interest expense		2,796		24		85,110			87,930
Depreciation and amortization		58,711		15,012		32,176			105,899
Segment profit (loss)		297,323		111,147		(145,723	)		262,747
Segment assets		2,815,506		805,609		49,001			3,670,116

1999	Health Plan		Government Contracts/ Specialty Services		Corporate and Other(i)			Total
Revenues from external sources	$	7,031,055	$	1,529,855	$	—		$	8,560,910
Intersegment revenues		—		78,083		—			78,083
Investment and other income		81,761		7,820		(2,604	)		86,977
Interest expense		5,624		102		78,082			83,808
Depreciation and amortization		71,409		14,736		25,896			112,041
Segment profit (loss)		218,318		118,455		(92,765	)		244,008
Segment assets		2,596,285		796,362		303,834			3,696,481

1998(ii)	Health Plan			Government Contracts/ Specialty Services		Corporate and Other(i)			Total
Revenues from external sources	$	7,124,161		$	1,411,267	$	—		$	8,535,428
Intersegment revenues		—			63,008		—			63,008
Investment and other income		76,455			19,500		(2,514	)		93,441
Interest expense		11,905			314		79,940			92,159
Depreciation and amortization		89,008			13,891		25,194			128,093
Segment profit (loss)		(101,959	)		123,385		(275,580	)		(254,154	)
Segment assets		2,780,783			800,767		281,719			3,863,269

(i)

Includes intersegment eliminations.

(ii)

Excludes workers' compensation segment treated as discontinued operations which was sold in 1998. See Note 3.

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NOTE 17—QUARTERLY INFORMATION (UNAUDITED)

The following interim financial information presents the 2000 and 1999 results of operations on a quarterly basis (in thousands, except per share data). Certain 1999 revenue amounts have been reclassified to conform to the 2000 presentation:

		March 31		June 30		September 30		December 31
2000:
Total revenues		$	2,199,335	$	2,229,600	$	2,287,815	$	2,359,805
Income from continuing operations before income taxes			55,262		62,796		70,444		74,245
Net income			34,055		38,695		44,647		46,226
BASIC EARNINGS PER SHARE(i)
	Net income		0.28		0.32		0.36		0.38
DILUTED EARNINGS PER SHARE(i)
	Net income		0.28		0.32		0.36		0.37

	March 31		June 30		September 30		December 31
1999:
Total revenues	$	2,158,344	$	2,128,989	$	2,156,920	$	2,203,634
Income from continuing operations before income taxes		78,779		46,549		58,341		60,339
Income before cumulative effect of a change in accounting principle, net of tax		47,338		27,969		35,089		37,386
Net income		41,921		27,969		35,089		37,386
BASIC AND DILUTED EARNINGS PER SHARE(i)
Income before cumulative effect of a change in accounting principle, net of tax		0.39		0.23		0.29		0.31
Net income		0.34		0.23		0.29		0.31

(i)

The sum of the quarterly earnings per share amounts may not equal the year-to-date earnings per share amounts due to rounding.

NOTE 18—FOHP, INC.

In 1997, the Company purchased convertible and nonconvertible debentures of FOHP, Inc., a New Jersey corporation ("FOHP"), in the aggregate principal amounts of approximately $80.7 million and $24.0 million, respectively. In 1997 and 1998, the Company converted certain of the convertible debentures into shares of Common Stock of FOHP, resulting in the Company owning 99.6% of the outstanding common stock of FOHP. The nonconvertible debentures mature on December 31, 2002.

    Effective January 1, 1999, Physicians Health Services of New Jersey, Inc., a New Jersey HMO wholly-owned by the Company, merged with and into First Option Health Plan of New Jersey ("FOHP-NJ"), a New Jersey HMO subsidiary of FOHP, and FOHP-NJ changed its name to Physicians Health Services of New Jersey, Inc. ("PHS-NJ"). Effective July 30, 1999, upon approval by the stockholders of FOHP at a special meeting, a wholly-owned subsidiary of the Company merged into FOHP and FOHP became a wholly-owned subsidiary of the Company. In connection with the merger, the former minority shareholders of FOHP are entitled to receive either $0.25 per share (the value per FOHP share as of December 31, 1998 as determined by an outside appraiser) or payment rights which entitle the holders to receive as much as $15.00 per payment right on or about July 1, 2001, provided

51

certain hospital and other provider participation conditions are met. Also in connection with the merger, additional consideration of $2.25 per payment right will be paid to certain holders of the payment rights if PHS-NJ achieves certain annual returns on common equity and the participation conditions are met. As of December 31, 2000, the Company determined that it is probable that these payment rights would be paid on or about July 1, 2001. Accordingly, the Company recorded a purchase price adjustment of $33.7 million to goodwill as of December 31, 2000.

NOTE 19—SUBSEQUENT EVENTS

In January 2001, the Company entered into a definitive agreement to sell its Florida health plan, known as Foundation Health, a Florida Health Plan, Inc., to Florida Health Plan Holdings II, LLC for $48 million which consists of $23 million in cash and a $25 million secured five-year note bearing 8 percent interest. The transaction is expected to close in the second quarter of 2001 subject to regulatory approvals and other customary conditions of closing.

    On February 14, 2001, the Connecticut State Medical Society filed a complaint in Connecticut State Court against Physicians Health Services of Connecticut, Inc. alleging violations of the Connecticut Unfair Trade Practices Act. The complaint alleges that PHS-CT engaged in conduct that was designed to delay, deny, impede and reduce lawful reimbursement to physicians who rendered medically necessary health care services to PHS-CT health plan members. The complaint, which is similar to others filed against the Company and other managed care companies, seeks declaratory and injunctive relief. The Company intends to vigorously defend the action.

    On February 14, 2001, a purported class action lawsuit was filed in Connecticut State Court against Physicians Health Services of Connecticut, Inc. by Kevin Lynch, M.D. and Karen Laugel, M.D. on behalf of physician members of the Connecticut State Medical Society who provide health care services to PHS-CT health plan members pursuant to provider service contracts. The complaint alleges that PHS-CT engaged in improper, unfair and deceptive practices by denying, impeding and/or delaying lawful reimbursement to physicians. The complaint, similar to the complaint referred to above filed against PHS-CT on the same day by the Connecticut State Medical Society, seeks declaratory and injunctive relief, and damages. The Company intends to vigorously defend the action.

52

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EXHIBIT 13.1
FINANCIAL HIGHLIGHTS HEALTH NET, INC.

MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS OF HEALTH NET, INC.

REPORT OF INDEPENDENT AUDITORS

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY HEALTH NET, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued) HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

EX-21.1

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Exhibit 21.1

Health Net, Inc. (DE)(95-4288333)

(All Subsidiaries wholly owned unless otherwise indicated)

•

Health Net of California, Inc. (CA)(95-4402957)

—Health Net Life Insurance Company (CA)(94-1555551)

•

Physicians Health Services, Inc. (DE)(06-1116976)

—FOHP, Inc. (NJ)(22-3314813)


» Physician Health Services of New Jersey, Inc. (NJ)(22-3241303)


» First Option Health Plan of Pennsylvania, Inc. (PA)(52-1935749)


» FOHP Agency, Inc. (NJ)(22-3409934)


—Physicians Health Services (Bermuda) Ltd. (Bermuda)(98-0153069)


—Physicians Health Services of Connecticut, Inc. (CT)(06-1084283)


—Physicians Health Services of New York, Inc. (NY)(06-1174953)


—Physicians Health Services Insurance of New York, Inc. (NY)(13-3584296)


—Physicians Health Insurance Services, Inc. (CT)(06-1254380)

—PHS Insurance of Connecticut, Inc. (CT)(06-1434898)

—PHS Real Estate, Inc. (DE)(06-1467640)

» PHS Real Estate II, Inc. (DE)(06-1459019)

•

QualMed, Inc. (DE)(84-1175468)

—QualMed Plans for Health of Colorado, Inc. (CO)(84-0975985)

» San Luis Valley Physicians Service Corp., Limited (CO)(84-0983782)*

—Health Net Health Plan of Oregon, Inc. (OR)(93-1004034)

•

FHS Life Holdings Company Inc. (DE)(86-0948528)

—Foundation Health Systems Life & Health Insurance Company (CO)(73-0654885)

•

HSI Eastern Holdings, Inc. (PA)(23-2424663)

—Greater Atlantic Health Service, Inc. (DE)(23-2632680)

» QualMed Plans for Health, Inc. (PA)(23-2348627)

» Greater Atlantic Preferred Plus, Inc. (PA)(23-2665783)

» Employ Better Care, Inc. (PA) (23-2697017)

•

HSI Advantage Health Holdings, Inc. (DE)(23-2867299)

—QualMed Plans for Health of Ohio and West Virginia, Inc. (OH)(25-1803681)

—QualMed Plans for Health of Western Pennsylvania, Inc. (PA)(23-2867300)

—Pennsylvania Health Care Plan, Inc. (PA)(25-1516632)

•

FH-Arizona Surgery Centers, Inc. (AZ)(86-0836312)

•

FH Surgery Limited, Inc. (CA)(68-0390434)

•

FH Surgery Centers, Inc. (CA)(68-0390435)

•

Foundation Health Facilities, Inc. (CA)(68-0390-438)

•

FH Assurance Company (Cayman Islands)(98-0150604)

•

Foundation Health Warehouse Company (CA)(68-0357852)

•

Memorial Hospital of Gardena, Inc. (CA)(33-0466850)

•

East Los Angeles Doctors Hospital, Inc. (CA)(95-3275451)

•

Foundation Health Vision Services, (dba AVP Vision Plan) (CA)(77-0067022)

•

Denticare of California, Inc. (CA)(94-2197624)

•

Managed Alternative Care, Inc. (CA)(95-4205929)

•

American VitalCare, Inc. (CA)(22-2646452)

•

Health Net Federal Services, Inc. (DE)(68-0214809)

•

Health Benchmarks, Inc. (DE)(95-4770499)

•

Integrated Pharmaceutical Services (CA)(68-0295375)

•

Foundation Health, A Florida Health Plan, Inc. (FL)(65-0453436)

•

Intercare, Inc. (AZ)(86-0660443)

•

Health Net of Arizona, Inc. (AZ)(36-3097810)

•

Interlease of Arizona, Inc. (AZ)(86-0520686)

•

Managed Health Network, Inc. (DE)(95-4117722)

—Health Management Center, Inc. of Wisconsin (WI)(39-1528989)

—HMC PPO, Inc. (MA)(04-3237484)

—Capital Area Venture, Inc. (PA)(68-0461903)

—Managed Health Network (CA)(95-3817988)

—MHN Reinsurance Company of Arizona (AZ)(95-4361727)

—MHN Services (CA)(95-4146179)

—MHN Services IPA, Inc. (NY)(13-4027559)

•

Employer & Occupational Services Group, Inc. (CA)(33-0854987)

—EOS Managed Care Services, Inc. (CA)(68-0303353)

—EOS Claims Services, Inc. (CA)(68-0165539)

—EOS Employment Services, Inc. (DE)(94-3037822)

—Compensation America Network Acquisition Co. (DE)

•

Gem Holding Corporation (UT)(87-0445881)

—Gem Insurance Company (UT)(87-0451573)

•

National Pharmacy Services, Inc. (DE)(84-1301249)

—Integrated Pharmacy Systems, Inc. (PA)(23-2789453)**

•

QualMed Plans for Health of Pennsylvania, Inc. (PA)(23-2456130)

•

Questium, Inc. (DE) (68-0443608)

•

MUI (Delaware) Shell, Inc. (DE) b

* A limited partnership in which QualMed Plans for Health of Colorado, Inc. is an 83.4% limited partner.

** National Pharmacy Services, Inc. owns approximately 90% of the outstanding common stock.

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Exhibit 21.1

EX-23.1

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EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

To the Board of Directors and Stockholders of
Health Net, Inc.
Woodland Hills, California

    We consent to the incorporation by reference in Registration Statements on Forms S-8 (i) filed on December 4, 1998 and on March 31, 1998, and (ii) No. 333-35193, No. 333-24621, No. 33-74780 and No. 33-90976 of our report dated February 20, 2001, appearing in and incorporated by reference in this Annual Report on Form 10-K of Health Net, Inc. (the "Company") for the year ended December 31, 2000.

/s/ DELOITTE & TOUCHE LLP Deloitte & Touche LLP

Los Angeles, California
February 20, 2001

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EXHIBIT 23.1