Health Net 2001 Annual Report Download - page 20

The foregoing summary description of the Rights does not purport to be complete and is qualified
in its entirety by reference to the Rights Agreement, which is incorporated by reference in Exhibits 4.2,
4.3 and 4.4 to this Annual Report.
CHARTER AMENDMENT AND RESTATEMENT. Effective May 7, 2001, the Company amended
and restated its Certificate of Incorporation to eliminate the separation of its Board of Directors into
three separate classes and to replace it with a Board of Directors that is elected on an annual basis,
and to eliminate a section relating to the removal of directors that was no longer applicable given the
class elimination. Such amendment and restatement was approved by the affirmative vote of over eighty
percent (80%) of the outstanding shares of Class A Common Stock of the Company at its 2001 Annual
Meeting of Stockholders. A copy of the complete Certificate of Incorporation as so amended and
restated is included as an Exhibit to this Annual Report.
CHANGE IN EXECUTIVE OFFICER: Effective January 28, 2002, Steven P. Erwin resigned as
Executive Vice President and Chief Financial Officer of the Company and Marvin P. Rich was
appointed in his place as Executive Vice President, Finance and Operations.
LEGISLATION. In 2001, the United States Senate and House of Representatives passed separate
bills, sometimes referred to as ‘‘patients’ rights’’ or ‘‘patients’ bill of rights’’ legislation, that seek, among
other things, to hold health plans liable for claims regarding health care delivery and improper denial
of care. This legislation would remove or limit federal preemption under the Employee Retirement
Income Security Act of 1974 (‘‘ERISA’’) that currently precludes most individuals from suing health
plans for causes of action based upon state law and would enable plan members to challenge coverage
and benefits decisions in state and federal courts. Although both bills provide for independent review
of decisions regarding medical care, the bills differ on the circumstances and procedures under which
lawsuits may be brought against managed care organizations and the scope of their liability. Congress
will attempt to reconcile the two bills in a conference committee. If patients’ bill of rights legislation is
enacted into law we could be subject to significant additional litigation risk and regulatory compliance
costs, which could be costly to us and could have a significant adverse effect on our results of
operations. Although we could attempt to mitigate our ultimate exposure to litigation and regulatory
compliance costs through, among other things, increases in premiums, there can be no assurance that
we would be able to mitigate or cover the costs stemming from litigation arising under patients’ bill of
rights legislation or the other costs that we could incur in connection with complying with patients’ bill
of rights legislation.
FOHP. Effective July 30, 1999, a wholly-owned subsidiary of ours merged with and into
FOHP, Inc., a then-majority owned subsidiary of ours, which, as a result of the merger, became a
wholly-owned subsidiary of the Company. In connection with the merger, the former minority
shareholders of FOHP were entitled to receive either $.25 per share 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 and other conditions are met. Also in connection with the
merger, certain holders of payment rights will also be entitled to receive additional consideration of
$2.25 per payment right (‘‘Bonus Consideration’’) if our New Jersey health plan achieves certain annual
returns on common equity and the participation conditions are met. In July and August 2001, based on
the satisfaction of certain participation and other conditions by the former minority shareholders of
FOHP, FOHP made aggregate payments of approximately $21.0 million to certain holders of payment
rights. FOHP will make up to an additional $6.7 million in payments to additional holders of payment
rights, subject to such holders submitting appropriate documentation. A determination on the
satisfaction of the conditions for payment of the Bonus Consideration will be made in 2002.
ASSET IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES. As part of our effort to
reduce ongoing selling, general and administrative expenses, during the third quarter of 2001, we
initiated a formal plan to reduce operating and administrative expenses for all of our business units
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