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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 JUNE 30, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NO. 1-10540
FOUNDATION HEALTH CORPORATION
(Exact name of Registrant as specified in its charter)
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<S> <C>
DELAWARE 68-0014772
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification
No.)
3400 DATA DRIVE, RANCHO CORDOVA, CA 95670
(Address of principal executive (Zip Code)
office)
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Registrant's telephone number, including area code:
(916) 631-5000
Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
TITLE OF EACH NAME OF EACH EXCHANGE
CLASS ON WHICH REGISTERED
- ------------------ -------------------------------------
<S> <C>
Common Stock New York Stock Exchange, Inc.
$.01 par value
</TABLE>
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. /X/
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on September
21, 1995 as reported on the New York Stock Exchange Composite Tape was
approximately $2,109,240,948.
As of September 22, 1995, the Registrant had 57,044,786 shares of Common
Stock outstanding and entitled to vote in the election of directors.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference to Part III of
this Form 10-K Report: Proxy Statement for Registrant's 1995 Annual Meeting of
Stockholders.
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PART I
ITEM 1. BUSINESS.
Foundation Health Corporation (the "Company") is an integrated managed care
organization which administers the delivery of managed health care services.
Through its subsidiaries, the Company offers group, Medicaid, individual and
Medicare health maintenance organization ("HMO") and preferred provider
organization ("PPO") plans; government sponsored managed care plans; and managed
care products related to workers' compensation insurance, administration and
cost-containment, behavioral health, dental, vision and pharmaceutical products
and services.
The Company has implemented managed care cost-containment programs,
cost-effective medical delivery systems and medical information management to
enable it to meet its business strategies. Over the past several years, the
Company has developed a diversified product line, has established a full range
of medical delivery systems and has achieved geographic expansion throughout the
west, southwest and southeast areas of the United States and in the United
Kingdom.
The Company was incorporated in Delaware in 1984. The Company's executive
offices are located at 3400 Data Drive, Rancho Cordova, California 95670, and
its telephone number is (916) 631-5000. Unless the context otherwise requires,
the term "Company" as used in this Report refers to Foundation Health
Corporation, a Delaware corporation, and its subsidiaries.
BUSINESS STRATEGY
The Company's business strategy is to develop, market and support the
delivery of quality, cost-effective managed care products that address the
health care needs of the Company's commercial, specialty services and government
customers.
The Company's business plan has the following primary objectives:
(i) Achieve multi-state enrollment of covered medical risk lives
(including Medicare, Medicaid and CHAMPUS lives);
(ii) Achieve significant market share in commercial, government and
specialty services managed care products in the markets the Company serves;
(iii) Continue the Company's strategy to vertically integrate its health
care delivery system; and
(iv) Continue to improve administrative processes in order to provide
quality services to its enrollees.
Mergers and acquisitions have played an important role in the implementation
of the Company's business strategy and are expected to continue to be important
to the Company's growth and development.
COMMERCIAL MANAGED CARE
MEDICAL HMO AND PPO. The Company owns medical HMO subsidiaries which
operate in Arizona, California, Colorado, Florida, Louisiana, Oklahoma, Texas
and Utah and has commercial HMO license applications pending in Alabama and
Nevada. The HMOs 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 the member. The Company's insurance subsidiaries have
established preferred provider organization ("PPO") products. PPOs are generally
a network of health care providers which offer their services to health care
purchasers, such as insurers and self-funded employers. 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. The Company assumes both underwriting
and administrative expense risk in return for the premium revenue it receives
from its medical HMO and PPO products. The HMOs and PPOs have contractual
arrangements with health care providers, some of which are closely
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affiliated with the Company, for the delivery of health care to the Company's
enrollees. Cost-effective delivery of health care services by such providers is
achieved through appropriate use of health care services, emphasizing preventive
health care services and encouraging the reduction of unnecessary
hospitalization and other services.
The following chart describes the Company's commercial HMO and insured PPO
membership by state and product:
JUNE 30, 1995
COMMERCIAL HMO AND INSURED PPO
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GROUP AND MEDICARE COMMERCIAL
STATE INDIVIDUAL RISK MEDICAID SUBTOTAL
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<S> <C> <C> <C> <C>
Arizona............................ 296,000 28,000 5,000 329,000
California......................... 522,000 18,000 80,000 620,000
Colorado........................... 19,000 -- -- 19,000
Florida............................ 43,000 26,000 23,000 92,000
Louisiana.......................... 6,000 -- -- 6,000
Texas.............................. 3,000 -- -- 3,000
Utah............................... 79,000 -- 4,000 83,000
Other.............................. 24,000 -- -- 24,000
----------- ----------- --------- -----------
Total.......................... 992,000 72,000 112,000 1,176,000
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PROVIDER ARRANGEMENTS. The Company's medical HMOs arrange for the delivery
of health care services to their enrollees by contracting with physicians,
either directly or through independent practice associations ("IPAs") and
medical groups, hospitals and other health care providers for a defined range of
health services, including primary and specialty care and outpatient diagnostic
services. Some of the IPAs and medical groups are affiliated with the Company,
including Foundation Health Medical Group, Inc. ("FHMG") and Thomas-Davis
Medical Centers, P.C., ("TDMC"), which are professional medical corporations
owned by a Company-affiliated physician. Each enrollee's primary care physician
plays a significant role in cost-control by practicing preventive medicine and
managing the use of specialty physicians, hospitals and ancillary providers. The
Company pays for health care services provided by IPAs and medical groups on a
capitated basis or pursuant to discounted fee-for-service arrangements. Under
capitation arrangements, the Company pays the IPA, medical group or hospital a
fixed amount per enrollee per month to cover the payment of all or most medical
services regardless of utilization, which transfers the risk of certain health
care costs to the provider organization. The Company also uses various risk
sharing and incentive arrangements to manage further the cost of providing
health care. The Company contracts for hospital services under a variety of
arrangements including capitation, per diem, discounted fee-for-service and flat
fee arrangements.
As a result of the increasing competition for health care providers
(especially primary care physicians) and rising health care costs, the Company
has implemented a strategy to construct and manage health care centers. FHMG and
TDMC employ the physicians at the centers to provide medical services to the
Company's enrollees. The Company provides facilities and support functions to
the health care centers and is reimbursed in the form of a management fee by the
affiliated professional corporations.
CONTROL OF HEALTH CARE COSTS. The profitability of the Company depends on
its ability to effectively control health care costs. Advances in medical
technologies, inflation, hospital costs, major epidemics and numerous other
external factors, including the aging of the population and other demographic
characteristics affecting the delivery of health care, may affect the ability of
HMOs, including the Company's HMOs, to predict and control health care costs.
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The Company manages health care costs by entering into payment arrangements
with health care providers and by sharing the risk of certain health care costs
with certain of the Company's contracting providers. The Company continues to
seek capitation arrangements with its physician providers. In addition, several
of the Company's hospital providers are paid pursuant to capitation
arrangements.
Under the Company's utilization review system, certain routine hospital
admissions and lengths of stay require prior authorization and concurrent
review. Post-discharge utilization review procedures are performed to evaluate
the quality and utilization of care. Health professionals also monitor and
become involved in case management of catastrophic cases in an effort to assist
enrollees in obtaining medical care and treatment options that may be more
appropriate and cost-effective than a long-term hospital stay.
RISK MANAGEMENT. In addition to the Company's cost control systems, the use
of medical underwriting criteria is an integral part of its risk management
efforts. In addition, the Company mitigates part of the risk of catastrophic
losses by maintaining reinsurance coverage for annual hospital costs incurred in
the treatment of an enrollee's illness. The Company believes that its
reinsurance policies significantly limit, at a reasonable premium cost, the risk
of catastrophic costs incurred by its enrollees. The Company also maintains
general liability, property, fidelity, and managed care professional liability
and directors and officers insurance coverage in amounts the Company believes to
be adequate. The Company requires contracting physicians, physician groups,
dentists, hospitals and ancillary providers to maintain malpractice insurance
coverage in amounts customary in the industry.
QUALITY MANAGEMENT. The Company's HMOs have programs to evaluate the
quality and appropriateness of care provided to its enrollees. The providers
participate in quality management programs through peer review procedures
conducted with the Company's medical directors. These procedures involve reviews
of the tests, types of treatment and procedures performed for specific diagnoses
as well as reviews of aggregate data. When considering whether to contract with
a provider, the Company's HMOs conduct a credentialling evaluation of the
applicant, including licensure, board certification, residency program
completion, malpractice claims history and ability to accommodate enrollment
demands. The Company's HMOs have customer service departments that work directly
with enrollees to respond to their concerns and have enrollee grievance
procedures to investigate and resolve complaints. The Company's HMOs also
conduct periodic surveys to assess enrollee satisfaction with the health care
delivery system, health care received and responsiveness to enrollees' needs.
MANAGED CARE INDEMNITY PRODUCTS. Through the Company's indemnity insurance
subsidiaries, the Company expands the managed care options for enrollees by
making available PPO, point-of-service and other insured managed care products.
These companies also offer group term and dependent life, accidental death and
dismemberment and long-term disability coverage, as well as dual choice and
out-of-area medical coverage.
SPECIALTY SERVICES MANAGED CARE
The Company is utilizing its experience in managing HMOs to apply managed
care concepts to areas such as dental, vision, prescription drugs, behavioral
health, workers' compensation insurance and administration and ancillary
services, in order to assist employers and other payers in meeting
cost-containment and integration of benefits goals both on an insured and
self-funded basis. The Company believes that offering a continuum of integrated
managed care products and selling them across broad product lines will result in
new sources of revenue, will increase membership in existing employer groups and
will enable the Company to sell its integrated products to new employer groups.
The Company's specialty services managed care operations consist of the
following groups:
DENTAL. DentiCare of California, Inc. ("DentiCare"), the Company's
dental HMO, offers prepaid commercial and Medicaid dental care services.
DentiCare served approximately 486,000 enrollees as of June 30, 1995.
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VISION. Foundation Health Vision Services dba AVP Vision Plans, the
Company's vision HMO, offers prepaid vision services in the major
metropolitan areas of California. AVP served approximately 124,000 enrollees
as of June 30, 1995.
BEHAVIORAL HEALTH. Foundation Health PsychCare Services, Inc. (formerly
Occupational Health Services, Inc.), the Company's behavioral health HMO,
provides managed care mental health, employee assistance and substance abuse
programs on both an insured and self-funded basis to employers, governmental
entities and other payers throughout the United States through a network of
contracted providers. Foundation Health PsychCare Services, Inc. provided
services to approximately 2.2 million eligible beneficiaries as of June 30,
1995.
WORKERS' COMPENSATION SERVICES. The Company applies its managed care
concepts, such as use of specialized preferred provider networks and
utilization review, to the operations of its workers' compensation
subsidiaries, California Compensation Insurance Company ("CalComp"),
Business Insurance Company and Combined Benefits Life Insurance Company,
which had estimated aggregate annual premiums in force at June 30, 1995 of
approximately $390 million. These subsidiaries expand the Company's workers'
compensation products to include insured risk products, permit the Company
to apply its managed care expertise to reduce the medical costs associated
with workers' compensation claims and enable the Company to develop and
market "24 hour" risk or "Combined Care" products covering employees for
medical care both on and off the job. The Company provides third party
administration of workers' compensation claims primarily to self-insured
employers, and operates a medical review and cost-containment business for
the workers' compensation industry primarily within California at the
current time.
PHARMACEUTICAL MANAGED CARE SERVICES. Integrated Pharmaceutical
Services, the Company's pharmaceutical subsidiary, provides pharmaceutical
managed care services, including a national pharmacy network and formulary,
pharmacy adjudication and claims processing services, to reduce costs. This
subsidiary also operates retail pharmacies at the Company's health care
centers to manage pharmacy-related costs.
SELF-FUNDED PRODUCTS. The Company has developed self-funded products
for employers who desire the cost containment aspects of an HMO product but
who want to self-insure the health care cost risk. The Company has developed
a provider network for these self-funded products. The Company's third party
administration subsidiaries provide administrative only arrangements,
including utilization review, managed care and claims administrative
services to employer groups and to medical groups and IPAs that are paid on
a capitated, at-risk basis.
GOVERNMENT CONTRACTS
The Company, through Foundation Health Federal Services, Inc. ("FHFS"), its
government contracts subsidiary, administers large, multi-year managed care
government programs. FHFS subcontracts to affiliated and unrelated third parties
the administration and health care risk of parts of these contracts. These
programs include a CHAMPUS managed care contract in Washington and Oregon to
provide health care services to approximately 227,000 CHAMPUS-eligible
beneficiaries which commenced health care services in March, 1995 and a similar
contract in Texas, Louisiana, Arkansas and Oklahoma to provide health care
services to approximately 590,000 CHAMPUS-eligible beneficiaries with health
care services scheduled to commence in November 1995. On August 31, 1995, FHFS
was notified of award by the Department of Defense of the multi-year TRICARE
managed care contract to provide health care services to approximately 720,000
CHAMPUS-eligible beneficiaries in California and Hawaii with health care
services scheduled to commence in April 1996. FHFS had previously been the prime
contractor under the predecessor contract to the TRICARE program from 1988
through January 31, 1994. The Company intends to compete for other managed care
contracts as they are announced by federal and state agencies. There can be no
assurance that the
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Company will be successful in managing the implementation and delivery of
services under several large, multi-year government managed care contracts or
whether any such contracts will provide the Company with an adequate level of
profitability.
FHFS also administers contracts in Massachusetts and New Jersey to enroll
Medicaid eligible individuals in managed care programs in those states. FHFS is
not at risk for the provision of any health care services under either of these
contracts.
PATIENT SERVICES
The Company owns and operates a 128-bed hospital located in Los Angeles,
California, the East Los Angeles Doctors Hospital, and a 200-bed hospital
located in Gardena, California, the Memorial Hospital of Gardena. Both of these
hospitals are accredited by the Joint Commission on the Accreditation of
Healthcare Organizations. The Company's strategy in maintaining ownership of
these hospitals depends on the continued cost-efficiency of the hospitals,
integration of the hospitals into the Company's Southern California HMO
networks, particularly with respect to the Medicaid population, and development
of subacute or related units which offer less costly care than acute
hospitalization and which contribute to the hospitals' revenues. Through its
wholly owned subsidiaries, American VitalCare, Inc. and Managed Alternative
Care, Inc., the Company is also engaged in the management of hospital subacute
care units serving chronically ill patients.
INFORMATION TECHNOLOGY
The Company's information technology systems include several computer
systems, each utilizing customized software and a network of on-line terminals.
The Company's operations use its computer-based information technology systems
for various purposes including claims processing, general accounting and health
services reporting. These systems also include enrollment and billing functions,
including membership verification capabilities, and analysis of transactions
relating to providers and enrollees, such as claims status, hospital admissions
and lengths of stay, outpatient care and utilization. The Company is heavily
dependent on its information technology systems and is in the process of
integrating the systems of its recently acquired operations. These systems will
need to be further enhanced as the Company's business expands and it offers new
products; there is no assurance the Company will not experience interruptions in
service as a result of the enhancement and integration of its information
technology systems.
SALES AND MARKETING
The Company's sales and marketing strategy and implementation for its
managed care products is defined and coordinated by its corporate sales and
marketing staff. Primary marketing responsibility for the Company's products
resides with a marketing director and a direct sales force at both the corporate
and subsidiary levels. In addition, these products are sold through independent
insurance agents and brokers. The Company is emphasizing cross-marketing of its
products to current and prospective customers through its corporate and
subsidiary sales and marketing staff. Medicaid and Medicare risk products are
primarily marketed by the HMOs' sales employees. Sales and marketing efforts are
also supported by advertising programs that employ television, radio,
newspapers, billboard and direct mail.
COMPETITION
The managed health care industry evolved primarily as a result of health
care buyers' concerns regarding rising health care costs. The industry's goal is
to infuse greater cost effectiveness and accountability into the health care
system through the development of managed care products, including HMOs, PPOs,
and specialized services such as mental health or pharmacy benefit programs,
while increasing the accessibility and quality of health care services. The
managed health care industry is highly competitive, both nationally and in the
Company's various service areas.
As HMO and PPO penetration of the health care market and the effects of
health care reforms increase nationwide, the Company expects that competition
for new contracts with large employer and government groups, small employer
groups and individuals will intensify. In addition, employers
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may choose to self-insure the health care risk while seeking benefit
administration and utilization review services from third parties to assist them
in controlling and reporting health care costs. In such an environment, the
Company believes that having a broad line of health care programs and products
available will be important in being selected by employers to manage the health
care products or coverage offered to their employees.
The Company's managed care products compete for group and individual
membership with conventional health insurance plans, Blue Cross/Blue Shield
plans, other HMOs, PPOs, third party administrators and health care companies,
and employers or groups who elect to self-insure. The Company's ability to
increase the number of persons covered by its products or services or to
increase its premiums and fees can be affected by the Company's level of
competition in any particular area. The Company believes that the principal
competitive factors affecting the Company's business include price, the level
and quality of service provided or arranged for, provider network capabilities,
the offering of innovative products and marketplace reputation. The Company also
faces competition from hospitals, health care facilities and other health care
providers who have combined and formed their own networks to contract directly
with employer groups and other prospective customers for the delivery of health
care services.
GOVERNMENT REGULATION
Government regulation of the Company's business is a changing area of the
law that varies from jurisdiction to jurisdiction and from product to product
and generally gives responsible administrative agencies broad discretion. The
Company believes that it is currently in compliance in all material respects
with the various federal and state licensing regulations and contract
requirements applicable to its current operations. To maintain such compliance,
it may be necessary for the Company to make changes from time to time in its
services, products, structure or marketing methods. Additional government
regulation, or future interpretation of existing regulations, could increase the
cost of the Company's compliance or otherwise affect the Company's operations,
products, profitability or business prospects. Non-compliance with government
regulations could also subject the Company to fines, penalties, cease and desist
orders, investigations, audits, reimbursement of funds previously received,
lower reimbursement levels and contract termination. The Company is unable to
predict what additional regulation, if any, affecting its business may be
enacted in the future or how existing or future regulations may be interpreted.
Increasingly states are considering various health care reform measures and
are adopting laws or regulations which may limit the Company's HMOs and
insurance operations' ability to control which providers are part of their
networks and may hinder their ability to effectively manage utilization and
cost. The Company is unable to predict what reforms, if any, may be enacted or
how those reforms would affect the Company's operations.
HMOS. All of the states in which the Company's HMOs offer products have
enacted statutes regulating the activities of those HMOs. Regulatory authorities
exercise extensive supervisory, investigatory and audit powers over HMOs. Most
states require periodic financial reports from HMOs licensed to operate in their
states and impose minimum capital or reserve requirements. Certain of the
Company's subsidiaries are required to retain for their own use cash generated
from their operations. In addition, certain of the Company's subsidiaries are
required by state regulatory agencies to maintain restricted cash reserves
represented by interest-bearing instruments which are held by trustees or state
regulatory agencies to ensure that adequate financial reserves are maintained.
Some state regulations enable agencies to review all contracts entered into by
HMOs for reasonableness of fees charged and other provisions.
The Company's HMOs which have Medicare risk contracts are subject to
regulation by the Health Care Financing Administration ("HCFA"), a branch of the
United States Department of Health and Human Services. HCFA has the right to
audit HMOs operating under Medicare risk contracts to determine each HMO's
compliance with HCFA's contracts and regulations and the quality of care being
rendered to the HMO's enrollees.
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The Company's HMOs which have Medicaid contracts are subject to both federal
and state regulation regarding services to be provided to Medicaid enrollees,
payment for those services and other aspects of the Medicaid program. Both
Medicare and Medicaid have in force and/or have proposed regulations relating to
fraud and abuse, physician incentive plans and provider referrals which may
affect the Company's operations.
Several of the Company's HMOs have contracts with the Federal Employees
Health Benefit Plan ("FEHBP"). These contracts are subject to extensive
regulation, including complex rules relating to the premiums charged. FEHBP has
the authority to retroactively audit the rates charged and frequently seeks
premium refunds and other sanctions against health plans participating in the
program. The Company's HMOs which have contracted with FEHBP are subject to such
audits and may be requested to make such refunds.
INSURANCE REGULATION. The Company's insurance subsidiaries are subject to
regulation by the Department of Insurance (the "DOI") in each state in which the
entity is licensed. Regulatory authorities exercise extensive supervisory power
over insurance companies with regard to the licensing of insurance companies,
including the nature of, and limitation on, an insurance company's investments,
periodic examination of the operations of insurance companies, and the
establishment of capital and surplus requirements for insurance companies. The
Company's insurance company subsidiaries are required to file periodic statutory
financial statements in each jurisdiction in which they are licensed, are
subject to an annual audit by an independent public accounting firm, and are
required to file on an annual basis an actuarial certification of the insurer's
reserves for losses and loss adjustment expenses. Additionally, such companies
are periodically examined by the insurance departments of the jurisdictions in
which they are licensed to do business.
INSURANCE HOLDING COMPANY REGULATIONS. Certain of the Company's HMOs and
each of the Company's insurance subsidiaries are subject to regulation under
state insurance holding company regulations. Such insurance holding company laws
and regulations generally require registration with the state DOI and the filing
of certain reports describing capital structure, ownership, financial condition,
certain intercompany transactions and general business activities. Various
notice and reporting requirements generally apply to transactions between
companies within an insurance holding company system, depending on the size and
nature of the transactions. Certain state insurance holding company laws and
regulations require prior regulatory approval or, in certain circumstances,
prior notice of, certain material intercompany transactions as well as certain
transactions between the regulated companies and their affiliates.
TPAS. Certain subsidiaries of the Company are also licensed as third party
administrators ("TPAs") in states where such licensing is required for their
activities. TPA regulations differ greatly from state to state and there are not
uniform or consistent applications of regulations from state to state.
UTILIZATION REVIEW REGULATIONS. A number of states have enacted laws and/or
adopted regulations governing the provision of utilization review activities.
Generally, these laws and regulations require compliance with specific standards
for the delivery of services, confidentiality, staffing, and policies and
procedures of private review entities, including the credentials required of
personnel. Some of these laws and regulations may affect certain operations of
the Company's businesses.
ERISA. The provision of goods and services to or through certain types of
employee health benefit plans is subject to the Employee Retirement Income
Security Act of 1974 ("ERISA"). ERISA is a complex set of laws and regulations
that are subject to periodic interpretation by the United States Department of
Labor. ERISA places certain controls on how certain of the Company's
subsidiaries may do business with employers covered by ERISA, particularly
employers that maintain self-funded plans. The Department of Labor is engaged in
an ongoing ERISA enforcement program which may result in additional constraints
on how ERISA-governed benefit plans conduct their activities. There recently
have been legislative attempts to limit ERISA's preemptive effect on state laws.
If such
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limitations were to be enacted, they might increase the Company's liability
exposure under state law-based suits relating to employee health benefits
offered by the Company's HMOs and specialty businesses and may permit greater
state regulation of other aspects of those businesses' operations.
GOVERNMENT PROGRAMS. FHFS is subject to extensive federal regulation and
cost accounting standards as a result of its government contracts, including
federal affirmative action and labor requirements, and in the future may be
subject to additional state regulations with respect to such contracts. FHFS is
also subject to federal and state regulations as a result of the administration
of Medicaid programs in various states.
HOSPITAL REGULATION. The operation of the Company's hospitals is also
subject to federal, state and local government regulation. These facilities are
subject to periodic inspection by state licensing agencies to determine that
standards of medical care and the physical plant necessary for continued
licensure are maintained. The hospitals are subject to environmental legislation
by virtue of the real property owned by the hospitals and by their operations,
including regulation of the disposal of medical waste.
Under the federal reimbursement program for inpatients, Medicare pays a
predetermined rate for each covered hospitalization. Each hospitalization is
classified into one of several hundred diagnosis related groups, which
classification determines the rate paid for the hospitalization. Outpatient
services are reimbursed on the basis of reasonable cost and/or per procedure
price.
The East Los Angeles Doctors Hospital and Memorial Hospital of Gardena have
Medicaid contracts which are subject to cancellation by the state or the
hospital on 120 days' prior notice without cause. If either hospital's Medicare
contract was terminated, the hospital would also cease to participate in
Medicaid. For the fiscal year ended June 30, 1995, the hospitals received
approximately 76.7% of their total revenues from the Medicare and Medicaid
contracts. The termination of participation in these programs would threaten the
hospitals' viability.
GOVERNMENT AUDITS. The Company is subject to and currently is undergoing
extensive governmental investigations and audits with respect to its government
contracts and Medicaid and Medicare programs. The results of such audits, which
may continue past the termination of the contracts, may result in reimbursement
to the governmental agencies of amounts previously paid by such governmental
agencies to the Company. The Company is also subject to regular and special
medical and financial investigations and audits by various state and federal
regulatory agencies with respect to the operations of its HMO and insurance
subsidiaries.
EMPLOYEES
As of June 30, 1995, the Company and its subsidiaries employed approximately
8,896 people. None of the Company's employees is presently covered by a
collective bargaining agreement, and the Company believes its employee relations
are good.
ITEM 2. PROPERTIES.
As of June 30, 1995, the Company leased approximately 1.2 million aggregate
square feet of space primarily for administrative offices, data processing
facilities and claims processing in the states in which it is doing business.
These leases expire at various dates through July 2002. The Company owns
approximately 486,000 aggregate square feet of space for health care centers in
California and Arizona and approximately 248,760 square feet of space for the
two hospitals in Southern California. The Company also leases approximately
245,000 aggregate square feet of space for health care centers in Arizona,
California and Florida, which leases expire at various dates through April 2003.
ITEM 3. LEGAL PROCEEDINGS.
The Company maintains general liability and managed care professional
liability and directors and officers liability insurance and other insurance
coverage it believes is typical in the industry. In the ordinary course of its
business, the Company is subject to claims and legal actions by enrollees,
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providers and others. See "Business -- Government Regulation." There can be no
assurance that claims in excess of the Company's insurance coverage will not
arise or that all claims would be covered by such insurance.
The Company has been requested pursuant to two separate non-public
Securities and Exchange Commission ("SEC") investigations, commencing in August
1992 in the case of Century MediCorp. Inc. ("CMC") and in August 1995 in the
case of Intergroup Healthcare Corporation ("Intergroup"), to provide information
regarding trading (i) in the common stock of CMC and the Company prior to the
July 1992 announcement of the proposed merger between CMC and the Company and
(ii) in the common stock of Intergroup prior to the July 1994 announcement of
the proposed merger between Intergroup and the Company. The SEC has not brought
charges in connection with either inquiry and has advised the Company that its
inquiries are not to be construed as an adverse reflection on any person or as
an indication that any violation of law has occurred.
Two actions, as previously disclosed, filed in 1993 against the Company, its
dental HMO subsidiary and certain present and former executive officers of the
Company and such subsidiary, continue in discovery or pleading stages and as
such, the Company cannot determine the liability, if any, that may be assessed
or result in these matters. The Company is defending these matters vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, who are elected by and serve at the
discretion of the Board of Directors, subject to rights under employment
agreements, are as follows:
Daniel D. Crowley, age 47, has been a director and the President and
Chief Executive Officer of the Company since May 1989. In May 1990, Mr.
Crowley was appointed Chairman of the Board of Directors of the Company.
Prior thereto, Mr. Crowley served Blue Cross and Blue Shield of Ohio in
various senior management positions, including Executive Vice President of
Statewide Operations, Chief Operating Officer of the Western Division and
Vice President.
Steven D. Tough, age 44, has been President and Chief Operating Officer
-- Government Operations since October 1994. He has been employed by the
Company and its subsidiaries in various capacities since 1978. Mr. Tough has
been a director of the Company since 1988.
Jeffrey L. Elder, age 47, was appointed Senior Vice President-Chief
Financial Officer of the Company in July 1992. Mr. Elder joined the Company
as Vice President-Financial Operations in July 1989 and was appointed Vice
President-Chief Financial Officer in March 1990. Prior thereto, Mr. Elder
served as Vice President-Administration of Medical Life Insurance Company.
Mr. Elder has been a director of the Company since 1991.
Kirk A. Benson, age 45, was appointed President and Chief Operating
Officer -- Commercial Operations in October, 1994 and has served as Senior
Vice President-Corporate Development of the Company since July 1991. Mr.
Benson has been employed by the Company in various capacities since March
1989.
Allen J. Marabito, age 49, joined the Company as Senior Vice
President-General Counsel and Secretary in July 1991. Prior thereto, Mr.
Marabito was a partner with the law firm of Climaco, Climaco, Seminatore,
Lefkowitz & Garofoli, Cleveland, Ohio.
There are no family relationships among directors or executive officers of
the Company.
9
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock is listed on the New York Stock Exchange, Inc.
(the "NYSE") under the symbol "FH." The following table sets forth, for the
periods indicated, the high and low sales prices of the common stock on the NYSE
Composite Tape.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
------------------
HIGH LOW
------- -------
<S> <C> <C>
Fiscal Year 1994
First Quarter.............................................. $35 $18 1/8
Second Quarter............................................. 32 21 3/4
Third Quarter.............................................. 41 1/2 29 3/4
Fourth Quarter............................................. 46 33 1/4
Fiscal Year 1995
First Quarter.............................................. 39 5/8 31 1/4
Second Quarter............................................. 37 1/2 29 3/4
Third Quarter.............................................. 34 7/8 26 3/8
Fourth Quarter............................................. 32 3/4 26 7/8
Fiscal Year 1996
First Quarter
(through September 21, 1995).............................. 38 3/4 26 3/4
</TABLE>
On September 21, 1995, the closing sale price of the common stock was
$37.125 per share. As of September 22, 1995, there were approximately 712
holders of record of the common stock.
The Company has never paid cash dividends on its common stock, except that
CareFlorida Health Systems, Inc., which merged with the Company in October 1994,
paid cash dividends to its shareholders prior to the merger. The Company
presently intends to retain its earnings for the development of its business and
does not anticipate paying cash dividends on its common stock in the foreseeable
future. The Company's loan agreements restrict payment of cash dividends on the
Company's common stock.
10
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
FOUNDATION HEALTH CORPORATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------------------
1991 1992 1993 1994 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Revenues:
Commercial premiums....................... $ 759,052 $ 900,660 $ 1,102,392 $ 1,358,616 $ 1,664,509
Government contracts...................... 584,997 670,271 746,827 542,726 187,493
Specialty services revenue................ 31,099 50,627 89,135 380,726 509,807
Patient service revenue, net.............. 16,377 40,612 43,483 41,358 41,323
Investment and other income............... 17,465 21,449 24,874 39,511 56,792
------------ ------------ ------------ ------------ ------------
1,408,990 1,683,619 2,006,711 2,362,937 2,459,924
------------ ------------ ------------ ------------ ------------
Expenses:
Commercial health care services........... 617,527 711,735 862,602 1,067,027 1,290,367
Government contracts health care
services................................. 149,659 171,983 188,139 152,185 67,508
Government contracts subcontractor
costs.................................... 388,822 419,817 432,903 252,743 66,551
Specialty services costs.................. 30,683 47,950 79,366 355,208 438,124
Patient service costs..................... 17,130 40,973 38,156 37,599 33,561
Selling, general and administrative....... 135,179 175,135 230,506 291,130 307,802
Amortization and depreciation............. 15,162 18,390 21,388 28,463 41,102
Interest expense.......................... 11,031 6,035 4,239 12,709 11,555
Acquisition and restructuring costs (2)... -- -- 12,413 -- 124,822
------------ ------------ ------------ ------------ ------------
1,365,193 1,592,018 1,869,712 2,197,064 2,381,392
------------ ------------ ------------ ------------ ------------
Income before income taxes and minority
interest................................... 43,797 91,601 136,999 165,873 78,532
Provision for income taxes.................. 12,877 34,737 57,026 64,834 26,821
Minority interest........................... -- 4,042 6,636 7,398 2,262
------------ ------------ ------------ ------------ ------------
Net income.................................. 30,920 52,822 73,337 93,641 49,449
Preferred stock dividends................... 1,721 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net income available to common
stockholders............................... $ 29,199 $ 52,822 $ 73,337 $ 93,641 $ 49,449
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Earnings per share.......................... $ 0.78 $ 1.32 $ 1.53 $ 1.92 $ 0.90
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Weighted average common and common stock
equivalent shares outstanding.............. 37,564,198 40,022,322 47,870,576 48,688,221 54,780,162
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
<CAPTION>
JUNE 30,
--------------------------------------------------------------------
1991 1992 1993 1994 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (1):
Cash and investments...................... $ 170,290 $ 291,919 $ 485,370 $ 765,572 $ 795,278
Total assets.............................. 441,405 632,037 916,247 1,498,508 1,964,207
Notes payable and capital leases.......... 59,592 51,688 142,048 170,108 180,054
Stockholders' equity...................... 113,127 263,427 342,398 422,443 756,899
<FN>
- --------------------------
(1) The Company's consolidated financial statements have been restated to
reflect the results of acquisitions accounted for in accordance with the
pooling of interests method of accounting. See Note 1 of Notes to the
Consolidated Financial Statements.
(2) In connection with certain acquisitions the Company recorded charges for
acquisition and restructuring costs. See Note 1 of Notes to the
Consolidated Financial Statements.
</TABLE>
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company's financial position and results of operations changed
significantly during fiscal year 1995 as a result of the following mergers and
acquisitions which enhanced the Company's geographic and product diversity:
<TABLE>
<CAPTION>
DATE OF ACQUISITION NATURE OF BUSINESS CONSIDERATION
- ------------------------------ ----------------------------------- -----------------------------------
<S> <C> <C>
PURCHASE TRANSACTIONS
July 1994 Workers compensation bill review $37 million cash plus common stock
and third party administration
November 1994 Colorado HMO $8.9 million common stock
November 1994 Florida Medicaid HMO $32.9 million cash plus note
November 1994 39.5% minority interest in Arizona $249.1 million common stock
and Utah managed care company
("Intergroup")
February 1995 Property and casualty insurance $13.2 million cash
company
POOLING TRANSACTIONS
October 1994 Florida managed care company $226.4 million exchange of common
("CareFlorida") stock
November 1994 Arizona professional corporation $438.9 million exchange of common
("TDMC") and its 60.5% interest in stock
Intergroup
</TABLE>
In addition to these mergers and acquisitions, in fiscal year 1995 the
Company's government contracts subsidiary was awarded a large government managed
care contract in Washington and Oregon to provide services to approximately
227,000 CHAMPUS-eligible beneficiaries (the "Washington/Oregon Contract"), which
commenced health care delivery in March 1995 and was awarded a similar contract
in April 1995 in Oklahoma, Arkansas and parts of Louisiana and Texas to provide
services to approximately 590,000 CHAMPUS-eligible beneficiaries (the "Region 6
Contract"), with health care delivery scheduled to commence in November 1995.
The financial information, enrollment data and related comparisons presented
in this discussion have been restated to include the results of CareFlorida,
TDMC and its majority interest in Intergroup for all periods presented. The
acquisitions accounted for under the purchase method of accounting have been
included in the Company's consolidated financial statements from their
respective dates of acquisition. This Management's Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction with
the accompanying consolidated financial statements and notes thereto included
elsewhere in this Annual Report on Form 10-K.
CONSOLIDATED OPERATING RESULTS
The Company achieved record revenues and earnings (before a $124.8 million
acquisition and restructuring charge net of related tax effects recorded in the
second quarter) for the fiscal year ended June 30, 1995. The growth in revenues
during fiscal year 1995 was primarily driven by commercial enrollment gains,
especially from the Company's individual and Medicare risk products, additional
Medicaid enrollment as a result of the acquisition of the Florida Medicaid HMO,
growth in net earned workers' compensation premium due to sales and recapture of
ceded premium and commencement of health care delivery under the
Washington/Oregon Contract during the third quarter. This growth was offset by
the January 31, 1994 expiration of the CRI Contract. Fiscal year 1994 revenues
included $431.3 million in revenues related to the CRI Contract. Revenues in
fiscal year 1994 exceeded fiscal
12
<PAGE>
year 1993 revenues of $2,006.7 million by 17.8%, primarily as a result of
increased commercial enrollment and specialty services revenues, including
revenues generated from CalComp which was acquired in August 1993.
Investment and other income, included as a component of the Company's
revenues, increased each year due primarily to the investment of excess surplus
and reserves generated by operations, a significant part of which was generated
by CalComp, acquired in August 1993, whose investments are primarily held in
tax-exempt securities. Investment income also increased due to the general rise
in interest rates during fiscal years 1993, 1994 and 1995.
The Company's selling, general and administrative ("SG&A") expenses in
fiscal year 1995 increased due primarily to the implementation costs of the
Washington/Oregon and Region 6 Contracts and start-up of the New Jersey Medicaid
administrative services only contract. The increase in SG&A expenses in fiscal
year 1994 over 1993 was due primarily to expenses related to the establishment
and operation of government claims processing as an internal function and the
inclusion of SG&A expenses related to Gem Insurance Company ("Gem"), the Utah
insurance subsidiary which was acquired by Intergroup effective January 1, 1994.
The ratio of SG&A expenses to total revenues (the "SG&A ratio") increased
from 11.5% in fiscal year 1993 to 12.3% in fiscal year 1994 to 12.5% in fiscal
year 1995. This increase was due primarily to the expiration of the CRI Contract
which resulted in the cessation of contract revenues effective January 31, 1994
while various administrative costs related to claims processing and other
activities continued during the wind-down period.
Amortization and depreciation expense increased each year primarily due to
increased depreciation as a result of the Company's ownership and construction
of health care centers and increased amortization of goodwill incurred in
connection with the purchase of the Intergroup minority interest and other
business acquisitions during fiscal years 1993, 1994 and 1995.
Interest expense increased in fiscal year 1994 from fiscal year 1993 due
primarily to the issuance of $125 million of Senior Notes in June 1993. Interest
expense decreased in fiscal year 1995 as a result of the prepayment of $11.4
million in bank debt by TDMC in November 1994.
In connection with the mergers of CareFlorida, TDMC and Intergroup, the
Company recorded a charge for integration, restructuring and pooling costs of
$124.8 million.
The acquisition and restructuring charge represents the costs of acquiring
and consolidating the companies' management information systems and
administrative functions and positioning the Company to take advantage of best
practices in healthcare delivery systems and managed care techniques after the
mergers.
The components of this charge include (in millions):
<TABLE>
<S> <C>
Professional fees....................................................... $ 21.5
Cancellation of certain contractual obligations and other settlement
costs.................................................................. 27.1
Write-off of certain redundant hardware, software and other settlement
costs.................................................................. 17.9
Elimination of duplicate facilities..................................... 13.0
Transition and severance related payments to employees.................. 36.5
Other integration and restructuring..................................... 8.8
------
Total............................................................... $124.8
------
------
</TABLE>
These costs satisfy the definition of "exit costs" as set forth in Emerging
Issues Task Force Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an
13
<PAGE>
Activity (including Certain Costs Incurred in a Restructuring)" that are
directly related to the mergers. Management of the Company anticipates the
integration and restructuring of the combined entities will be substantially
complete by the end of the fourth quarter of fiscal year 1996.
Full implementation of the restructuring plan will result in the termination
of 638 employees (291 employees had been terminated as of June 30, 1995) by
eliminating and consolidating duplicate administrative, information systems and
sales functions.
As of June 30, 1995, $62.8 million (primarily professional fees, transition
and related severance payments and write-off of impaired assets) in merger,
integration and restructuring costs have been paid or otherwise charged against
the $124.8 million accrual. The remaining restructuring obligations are expected
to be substantially paid as due through the fourth quarter of fiscal year 1996
utilizing existing cash resources of the Company. The amounts set forth above
represent management's best estimate of the restructuring costs to be incurred
and the timing of the restructuring and integration plan (the "Plan"). The
progress of the Plan and the actual amounts incurred could vary from these
estimates if future developments differ from the underlying assumptions used by
management in developing the recorded accrual. The Company expects that this
restructuring will result in operating cost savings in excess of the amount of
the charge.
As a result of the factors described above and despite expiration of the CRI
Contract in January 1994, income before income taxes and minority interest grew
from $149.4 million in fiscal year 1993 (before acquisition and restructuring
costs) to $165.9 million in 1994. After acquisition and restructuring costs,
income before income taxes and minority interest was $137.0 million in fiscal
year 1993. In fiscal year 1995, income before income taxes and the minority
interest grew to $203.3 million (before acquisition and restructuring costs).
After acquisition and restructuring costs, income before income taxes and
minority interest was $78.5 million in fiscal year 1995.
The tax provision rate for fiscal year 1994 of 39.1% was 2.5% lower than for
fiscal year 1993, because of acquisition expenditures in the earlier year which
were not deductible for income tax purposes, and the acquisition in fiscal year
1994 of CalComp, which is not subject to state income or franchise taxes. The
tax provision rate dropped further in fiscal year 1995 to 34.2% because of the
combined effect of the acquisition and restructuring charge of $124.8 million
and the resulting increased proportion of tax-exempt interest income as a
percentage of pre-tax income. The rate was further reduced by the acquisition of
Intergroup, which is not subject to state franchise or income taxes, and the
elimination of a duplicate tax for undistributed income from Intergroup to its
former parent company. These rate reductions were mitigated by the effects of
non-deductible acquisition expenses.
Minority interest represents the allocation of Intergroup's net income to
the holders of the 39.5% shares of Intergroup common stock not held by TDMC (the
"Intergroup Minority Interest"), for the periods prior to the Company's
acquisition of the Intergroup Minority Interest.
Through the combination of the factors described above, net income grew from
$82.5 million or $1.72 per share in fiscal year 1993 (before the $12.4 million
acquisition and restructuring costs net of related tax effects) to $93.6 million
or $1.92 per share in fiscal year 1994. After the acquisition and restructuring
costs net of related tax effects in fiscal year 1993, net income was $73.3
million or $1.53 per share. In fiscal year 1995, net income increased to $128.8
million or $2.35 per share (before the $124.8 million acquisition and
restructuring costs net of related tax-effects). After such charge net of
related tax effects, net income for fiscal year 1995 was $49.4 million or $.90
per share.
The Company's ability to expand its business is dependent, in part, on
competitive premium pricing and its ability to secure cost-effective contracts
with providers. Achieving these objectives is becoming increasingly difficult
due to the competitive environment. In addition, the Company's profitability is
dependent, in part, on its ability to maintain effective control over health
care costs while providing members with quality care. Factors such as health
care reform, integration of acquired companies, regulatory changes, utilization,
new technologies, hospital costs, major epidemics
14
<PAGE>
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.
LINE OF BUSINESS REPORTING
The Company operates in a single industry segment, managed health care. The
following table presents financial information reflecting the Company's
operations by the three primary lines of business: (i) commercial operations;
(ii) government contracts; and (iii) specialty services. This information is
provided to facilitate a more meaningful discussion of the Company's results of
operations. As patient services (the operations of the Company's two hospitals)
represents less than 2.5% of the Company's total revenues for all lines of
business, a detailed discussion is not presented.
Commercial operations includes the Company's HMOs and life and health
insurance subsidiaries. This line of business is characterized by operations in
which the Company assumes underwriting risk in return for premium revenue.
Government contracts consists of contractual services to state and federal
government programs such as CHAMPUS and administrative-only Medicaid contracts
in which the Company receives revenues for administrative and management
services and, under the CHAMPUS contracts, also accepts financial responsibility
for health care costs. Specialty services includes operations in which the
Company assumes underwriting risk in return for premium revenue, including
managed care workers' compensation insurance and behavioral health, dental and
vision HMO products, and operations in which the Company provides administrative
services only, including certain of the behavioral health and pharmacy benefits
management programs, workers' compensation third party administration and bill
review services and administrative-only products and services.
15
<PAGE>
LINE OF BUSINESS FINANCIAL INFORMATION
FOUNDATION HEALTH CORPORATION
<TABLE>
<CAPTION>
1993 1994
-------------------------------------- -------------------------------------
PERCENT OF PERCENT PERCENT OF PERCENT
AMOUNT OR TOTAL INCREASE AMOUNT OR TOTAL INCREASE
PERCENT REVENUE (DECREASE) PERCENT REVENUE (DECREASE)
---------- ----------- ------------- ---------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Commercial premiums......... $1,102,392 54.9% 22.4% $1,358,616 57.5% 23.2%
Government contracts........ 746,827 37.2 11.4 542,726 23.0 (27.3)
Specialty services
revenue.................... 89,135 4.4 76.1 380,726 16.1 327.1
Patient service revenue,
net........................ 43,483 2.2 7.1 41,358 1.8 (4.9)
Investment and other
income..................... 24,874 1.2 16.0 39,511 1.7 58.8
---------- ----- ---------- -----
2,006,711 100.0 19.2 2,362,937 100.0 17.8
---------- ----- ---------- -----
Expenses:
Commercial health care
services................... 862,602 43.0 21.2 1,067,027 45.2 23.7
Government contracts health
care services.............. 188,139 9.4 9.4 152,185 6.4 (19.1)
Government contracts
subcontractor costs........ 432,903 21.6 3.1 252,743 10.7 (41.6)
Specialty services costs.... 79,366 4.0 65.5 355,208 15.0 347.6
Patient service costs....... 38,156 1.9 (6.9) 37,599 1.6 (1.5)
Selling, general and
administrative ("SG&A").... 230,506 11.5 31.6 291,130 12.3 26.3
Amortization and
depreciation............... 21,388 1.1 16.3 28,463 1.2 33.1
Interest expense............ 4,239 0.2 (29.8) 12,709 0.5 199.8
Acquisition and
restructuring costs........ 12,413 0.6 N/A -- -- N/A
---------- ----- ---------- -----
1,869,712 93.2 17.4 2,197,064 93.0 17.5
---------- ----- ---------- -----
Income before income taxes.... 136,999 6.8 49.6 165,873 7.0 21.1
Provision for income
taxes...................... 57,026 2.8 64.2 64,834 2.7 13.7
Minority interest........... 6,636 0.3 64.2 7,398 0.3 11.5
---------- ----- ---------- -----
Net income.................... $ 73,337 3.7% 38.8 $ 93,641 4.0% 27.7
---------- ----- ---------- -----
---------- ----- ---------- -----
Earnings per share............ $ 1.53 27.5 $ 1.92 25.5
---------- ----------
---------- ----------
Weighted average common and
common stock equivalent
shares outstanding........... 47,840,576 8.7 48,688,221 1.8
---------- ----------
---------- ----------
Operating Ratios:
Commercial loss ratio....... 78.2% 78.5%
Government contracts ratio.. 83.2 74.6
Specialty services ratio.... 89.0 93.3
Patient service ratio....... 87.7 90.9
S G & A to total revenues... 11.5 12.3
Effective tax rate.......... 41.6 39.1
Enrollment:
Commercial:
Group and individual...... 661 5.8 828 25.3
Medicare risk............. 28 55.6 46 64.3
Medicaid.................. 83 76.6 111 33.7
---------- ----- ---------- ------
772 11.9 985 27.6
---------- ----- ---------- ------
Government:
CHAMPUS PPO and
indemnity................ 713 0.3 86 (87.9)
CHAMPUS HMO............... 258 33.0 24 (90.7)
---------- ----- ---------- ------
971 7.3 110 (88.7)
---------- ----- ---------- ------
Combined................ 1,743 9.3% 1,095 (37.2)%
---------- ----- ---------- ------
---------- ----- ---------- ------
<CAPTION>
1995
--------------------------------------
PERCENT OF PERCENT
AMOUNT OR TOTAL INCREASE
PERCENT REVENUE (DECREASE)
---------- ----------- -------------
<S> <C> <C> <C>
Revenues:
Commercial premiums......... $1,664,509 67.7% 22.5%
Government contracts........ 187,493 7.6 (65.5)
Specialty services
revenue.................... 509,807 20.7 33.9
Patient service revenue,
net........................ 41,323 1.7 (0.1)
Investment and other
income..................... 56,792 2.3 43.7
---------- -----
2,459,924 100.0 4.1
---------- -----
Expenses:
Commercial health care
services................... 1,290,367 52.5 20.9
Government contracts health
care services.............. 67,508 2.7 (55.6)
Government contracts
subcontractor costs........ 66,551 2.7 (73.7)
Specialty services costs.... 438,124 17.8 23.3
Patient service costs....... 33,561 1.4 (10.7)
Selling, general and
administrative ("SG&A").... 307,802 12.5 5.7
Amortization and
depreciation............... 41,102 1.7 44.4
Interest expense............ 11,555 0.5 (9.1)
Acquisition and
restructuring costs........ 124,822 5.1 N/A
---------- -----
2,381,392 96.8 8.4
---------- -----
Income before income taxes.... 78,532 3.2 (52.7)
Provision for income
taxes...................... 26,821 1.1 (58.6)
Minority interest........... 2,262 0.1 (69.4)
---------- -----
Net income.................... $ 49,449 2.0% (47.2)
---------- -----
---------- -----
Earnings per share............ $ 0.90 (53.1)
----------
----------
Weighted average common and
common stock equivalent
shares outstanding........... 54,780,162 12.5
----------
----------
Operating Ratios:
Commercial loss ratio....... 77.5%
Government contracts ratio.. 71.5
Specialty services ratio.... 85.9
Patient service ratio....... 81.2
S G & A to total revenues... 12.5
Effective tax rate.......... 34.2
Enrollment:
Commercial:
Group and individual...... 992 19.8
Medicare risk............. 72 56.5
Medicaid.................. 112 0.9
---------- -----
1,176 19.4
---------- -----
Government:
CHAMPUS PPO and
indemnity................ 251 191.9
CHAMPUS HMO............... 86 258.3
---------- -----
337 206.4
---------- -----
Combined................ 1,513 38.2%
---------- -----
---------- -----
</TABLE>
16
<PAGE>
COMMERCIAL OPERATIONS
Revenues generated by the Company's commercial operations increased in
fiscal year 1995 over fiscal year 1994 due in part to inclusion of revenues from
the January 1994 purchase of Gem and the November 1994 purchases of the Colorado
HMO and the Florida Medicaid HMO as well as increased enrollment in existing
lines of business. Revenues in fiscal year 1994 increased over fiscal year 1993,
reflecting increased enrollment growth and as well as the inclusion of revenue
from Gem for the last six months of fiscal year 1994. The Company anticipates
revenues to increase during fiscal year 1996 primarily as a result of enrollment
growth; however, the rate of increase is not expected to be at the same level as
in prior years since, to some extent, prior year increases have resulted from
businesses acquired and the Company anticipates continued pressure on its
ability to increase premium rates.
The Company expects continued pressure from employer groups and government
agencies to reduce premiums. Effective July 1, 1995, Medicaid HMO rates in
Florida were reduced by approximately 18%, which will affect commercial premium
revenues. Employer groups continue to demand lower premium increases and in some
cases, premium decreases. The Company has managed health care costs and
decreased the rate at which its health care costs have grown, by a number of
strategies, including greater controls on hospital utilization, the generation
of cost savings through national health care purchasing contracts (including
mental health, home health and pharmacy) and long-term hospital provider
contracts, reduction in specialist reimbursement rates and utilization and
development and management of health care centers. The Company is starting to
realize the impact of implementing these strategies on its recent acquisitions.
The Company's continued medical cost management efforts are reflected in the
commercial loss ratio, which improved in fiscal year 1995 from fiscal year 1994.
The slight increase in the ratio in fiscal year 1994 over that in fiscal year
1993 was due to the competitive pressures in California offset in part by the
greater profitability of the Company's Florida and Arizona HMOs. The Company
believes that the pressures on margins will continue, which may adversely affect
the commercial loss ratio; however, the Company will seek to mitigate any
increase in the loss ratio by the cost management efforts described above. In
addition, as the Company's Medicare risk business increases, the loss ratio may
increase as historically this product has a higher loss ratio than the Company's
other HMO and indemnity insurance business.
GOVERNMENT CONTRACTS
Government contracts revenue decreased in each of the last two fiscal years
primarily due to the expiration of the CRI Contract in January 1994. The CRI
Contract contributed $682.1 million to revenues in fiscal year 1993 and $431.3
million in fiscal year 1994. The Company commenced health care delivery under
its managed care contract in Louisiana and Texas in May 1993 and under the
Washington/Oregon Contract in March 1995. Government contracts revenue is
impacted by semi-annual bid price adjustments, annual price increases or
decreases, risk sharing provisions and various other price adjustments
attributable to change orders for additional services, inflation and other
factors. On August 31, 1995, FHFS was notified of award by the Department of
Defense of the multi-year TRICARE managed care contract to provide services to
approximately 720,000 CHAMPUS-eligible beneficiaries in California and Hawaii.
Health care services are scheduled to commence in April 1996. The contract is
valued at approximately $2.5 billion in revenue over the projected five year
term.
The government contracts ratio improved in each of the last two fiscal
years. The improvement from fiscal year 1993 to fiscal year 1994 was due
primarily to lower health care costs under the CRI Contract attributable to
effective managed care techniques, shifting of claims processing from an outside
vendor to an internal function and increased change order revenue. The continued
improvement in fiscal year 1995 was due to the continued phase-out of the CRI
Contract. The government contracts ratio is expected to increase in fiscal year
1996 as a result of a full year of delivery of health care services under the
Washington/Oregon Contract and delivery of health care services under the Region
6 Contract which are scheduled to commence in November 1995 and the TRICARE
contract which are scheduled to comence in April 1996.
17
<PAGE>
SPECIALTY SERVICES
Specialty services revenues increased from $89.1 million in fiscal year 1993
to $380.7 million in fiscal year 1994 to $509.8 million in fiscal year 1995. A
significant part of the increases was due to revenues related to CalComp which
was acquired in August 1993 and to the Company's workers' compensation bill
review and third party administration subsidiaries which were acquired in July
1994. In addition, during fiscal year 1995, several of the Company's specialty
services subsidiaries recorded increased revenues related to start-up Medicaid
contracts.
The increase in the specialty services ratio in fiscal year 1994 over that
of fiscal year 1993 was primarily a result of the purchase of CalComp, which
generally has a higher operating ratio than the other specialty services
businesses. The improvement in the ratio in fiscal year 1995 was primarily due
to improvement in the workers' compensation operating ratios, discussed below,
through the successful implementation of managed care programs, which has
lowered workers' compensation medical costs and the addition of the workers'
compensation bill review company, which was acquired in July 1994, which has a
lower administrative component than most of the other specialty services
companies.
Commencing in 1993, several significant reforms to the California workers'
compensation laws affected CalComp. The reforms address various aspects of the
workers' compensation system, including limitations on certain types of claims,
restrictions on vocational rehabilitation benefits, additional penalties for
fraud and abuse, and reductions in state-mandated minimum premium rates which
culminated in open rating in California effective January 1, 1995. Since the
acquisition of CalComp, the Company has taken various actions to mitigate the
effects of the reforms and the sharp premium declines as a result of the more
competitive pricing environment under open rating. These actions include
development and implementation of its managed care approach to workers'
compensation, continued use of loss prevention and return to work programs,
shifting of the risk profile of CalComp's business, increased use of the
Company's PPO and blended case management systems (which have reduced the
average severity per claim), and payment of lower average commissions to agents
and brokers in California on new and renewal policies written in 1995. The
Company believes this strategy should contribute to the continued growth of this
part of the specialty services operations and may offset the impact from the
changes in the California workers' compensation marketplace.
Four ratios are traditionally used to measure underwriting performance of
workers' compensation companies: the loss and loss adjustment expense ratio, the
underwriting expense ratio and the policyholder dividend ratio, which when added
together constitute the combined ratio. A combined ratio of greater than 100%
reflects an underwriting loss, while a combined ratio of less than 100%
indicates an underwriting profit.
The following table sets forth CalComp's underwriting experience as measured
by its combined ratio and its components (computed on a generally accepted
accounting principles basis) for the fiscal year ended June 30, 1995 and the
eleven months from August 1, 1993 (the date of acquisition) to June 30, 1994:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Loss and loss adjustment expense ratio............................................... 62.8% 62.8%
Underwriting expense ratio........................................................... 22.7 24.0
Policyholder dividend ratio.......................................................... 1.4 7.4
--- ---
Combined ratio....................................................................... 86.9% 94.2%
</TABLE>
CalComp was able to maintain a consistent loss and loss adjustment expense
ratio in fiscal year 1995 through the successful implementation of managed care
programs, as described above, and the increased use of internal staff to support
fair hearing representatives in the settlement of claims, despite the 16%
decrease in the minimum rates in California effective October 1, 1994, and the
abolishment of minimum rates and the commencement of open rating effective
January 1, 1995. The
18
<PAGE>
decrease in the combined ratio from fiscal year 1994 to fiscal year 1995 was
primarily due to the 6.0% decrease in the policyholder dividend ratio and the
1.3% reduction in the underwriting expense ratio. The underwriting expense ratio
decrease is primarily due to the decrease in employee salaries and benefits to
9.7% of premiums in fiscal year 1995 from 11.0% in fiscal year 1994. CalComp was
able to achieve this decrease during a period when net premiums earned increased
by 20%; however, approximately one-half of such increase was the result of
cancellation of CalComp's quota share reinsurance arrangement effective July 1,
1994. Workers' compensation reforms and increased price competition have also
resulted in lower policyholder dividends incurred as policyholders now receive
the benefit of lower workers' compensation costs in the form of reduced premiums
at the inception of the policy versus policyholder dividends paid after the
policy expires.
QUARTERLY RESULTS
The following table presents unaudited consolidated operating results for
the last eight fiscal quarters. The Company believes that all necessary
adjustments, consisting only of normal recurring adjustments, have been included
in the amounts stated below to present fairly the following quarterly results
when read in conjunction with the Company's consolidated financial statements
included elsewhere herein. Results of operations for any particular quarter are
not necessarily indicative of results of operations for a full fiscal year.
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FISCAL 1994
Total revenues.......................................................... $ 621.3 $ 637.5 $ 578.9 $ 525.2
Income before income taxes and minority interest........................ $ 39.9 $ 47.7 $ 40.0 $ 38.3
Net income.............................................................. $ 22.3 $ 27.3 $ 22.4 $ 21.7
Earnings per share...................................................... $ 0.47 $ 0.56 $ 0.46 $ 0.44
FISCAL 1995
Total revenues.......................................................... $ 594.4 $ 598.5 $ 615.6 $ 651.4
Income (loss) before income taxes and minority interest................. $ 39.3 $ (76.8) $ 57.8 $ 58.2
Net income (loss)....................................................... $ 23.7 $ (49.3) $ 36.3 $ 38.8
Earnings (loss) per share............................................... $ 0.48 $ (0.90) $ 0.63 $ 0.68
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $201.9 million for the year ended
June 30, 1995 as compared to $144.1 million for the prior year. The increase was
due primarily to the Company's profitable operations, especially those of
CalComp. The Company's cash and investments increased from $765.6 million at
June 30, 1994 to $795.3 million at June 30, 1995. The Company invests its cash
in investment grade securities.
The total cash portion of the purchase price for acquisitions completed in
fiscal year 1995 described in Note 1 of the Notes to the Consolidated Financial
Statements is $61.1 million, $53.2 million of which has been paid to date with
the remainder to be paid in November 1995.
During fiscal year 1996, the Company expects capital expenditures to
approximate $67.8 million, primarily consisting of $47.7 million for the
purchase of computer hardware and software systems; $15.3 million for the
purchase of furniture and equipment primarily for the health care centers and
the hospitals; and $4.8 million for other requirements. The Company anticipates
the net costs of operating and managing the health care centers for fiscal year
1996 will approximate $20 million, offset in part by health care cost savings
anticipated to be realized by the Company's HMOs. Effective September 1, 1995,
the Company purchased a medical practice and related facilities in Arizona for
approximately $6.2 million, which was paid in cash.
The anticipated level of capital expenditures in fiscal year 1996 for
construction of health care centers and corporate facilities has been impacted
as a result of the Company's $60 million tax-retention operating lease financing
with NationsBank of Texas, N.A., as Administrative Agent for the
19
<PAGE>
Lenders parties thereto and First Security Bank of Utah, N.A., as Owner Trustee
(the "TROL" financing). The Company expects that up to $32 million of the TROL
financing will be used during fiscal year 1996 for the construction of health
care centers and corporate facilities.
The Company's regulated subsidiaries are required to maintain minimum
tangible net equity or capital and surplus. As of June 30, 1995, restricted net
assets of the subsidiaries totaled approximately $34.3 million. Certain
subsidiaries must also maintain current ratios of 1:1. During fiscal year 1995,
the Company contributed $35 million to CalComp to meet rating agency
requirements to maintain an A- rating and to support future premium growth. The
Company also contributed $14 million to its United Kingdom subsidiary for
required capital and surplus to support its operations. As the Company's
businesses continue to grow, the Company expects to contribute additional cash
to certain subsidiaries to support premium and revenue growth. In addition, the
Company's regulated subsidiaries are required to keep securities on deposit in
various states where they are licensed. At June 30, 1995, approximately $364.9
million in securities were restricted to satisfy various state regulatory and
licensing requirements.
In December 1994, the Company established a $300 million unsecured revolving
credit agreement with Citicorp USA, Inc. as Administrative Agent (the "Credit
Agreement") for the lenders parties thereto. As of August 31, 1995, the Company
has drawn $60 million under the Credit Agreement. In June 1993, the Company
issued $125 million of Senior Notes due June 1, 2003, which bear interest at
7 3/4% due semi-annually. See Notes 7 and 12 to the Consolidated Financial
Statements for a more detailed description of the TROL financing, the Credit
Agreement and the Senior Notes.
In April 1993, the Company established a stock repurchase program (as
amended) to acquire from time to time up to 5.7 million shares of the Company's
common stock in the open market at prices deemed appropriate by management and
subject to market conditions and other relevant factors. As of June 30, 1995,
the Company had repurchased 1,545,500 shares under the program, 100,000 of which
were repurchased in fiscal year 1995.
Management of the Company continually evaluates opportunities to expand the
Company's commercial, government contracts and specialty services operations.
The Company's expansion options may include additional acquisitions and internal
development of new products and programs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and related financial information required to be
filed hereunder are set forth at the pages indicated at Item 14(a) of this
Report.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
------------------------
The Company's 1995 Annual Report to Stockholders is not to be deemed filed
as a part of this Report.
PART III
Certain information required by Part III is omitted from this Report in that
the registrant will file a definitive proxy statement pursuant to Regulation 14A
(the "Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning the Company's directors required by this Item is
incorporated by reference from the Company's Proxy Statement. No biographical
information is provided for Robert Anderson who is not a nominee for director.
20
<PAGE>
The information concerning the Company's executive officers required by this
Item is incorporated by reference to the section in Part I hereof entitled
"Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from the
Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference from the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference from the
Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Report:
1. FINANCIAL STATEMENTS.
The following Consolidated Financial Statements of Foundation Health
Corporation and its subsidiaries and the Independent Auditors' Report therein
are filed as part of this Report:
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report..................................................................... 26
Consolidated Balance Sheets as of June 30, 1994 and 1995......................................... 27
Consolidated Statements of Operations for the years ended June 30, 1993, 1994 and 1995........... 28
Consolidated Statements of Stockholders' Equity for the years ended June 30, 1993, 1994 and
1995............................................................................................ 29
Consolidated Statements of Cash Flows for the years ended June 30, 1993, 1994 and 1995........... 30
Notes to Consolidated Financial Statements....................................................... 31
The independent auditors' reports for predecessor companies for the years ended December 31, 1993
and 1992 are included in Exhibits 13.1, 13.2 and 13.3
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES. The following consolidated financial
statement schedules of Foundation Health Corporation and its subsidiaries are
filed as part of this Report and should be read in conjunction with the
Consolidated Financial Statements of Foundation Health Corporation:
<TABLE>
<CAPTION>
SCHEDULE PAGE
- ------------------------------------------------------------------------------------------------- -----
<S> <C>
Article 5, Schedule I -- Condensed Financial Information of Registrant........................... S-1
Article 5, Schedule V -- Supplemental Information Concerning Property -- Casualty Insurance
Operations...................................................................................... S-4
Section 403.04.b -- Reconciliation of Beginning and Ending Class Reserves and Exhibit of
Deficiencies (Redundancies)..................................................................... S-5
</TABLE>
Schedules not listed above have been omitted because they are not applicable
or are not required or the information required to be set forth therein is
included in the Consolidated Financial Statements or Notes thereto.
3. EXHIBITS. The Exhibits listed on the accompanying Index to Exhibits
immediately following the financial statement schedules are filed as part of, or
incorporated by reference into, this Report.
21
<PAGE>
Executive Compensation Plans and Arrangements:
A. 1990 Stock Option Plan of Foundation Health Corporation (as amended and
restated effective April 20, 1994) -- Exhibit 10.102;
B. Foundation Health Corporation Profit Sharing and 401(k) Plan (as amended
and restated effective January 1, 1994) -- Exhibit 10.103;
C. Executive Incentive Plan of Foundation Health Corporation -- Exhibit
10.3; Form 10-K filed September 23, 1994;
D. Employment Agreement between Foundation Health Corporation and Daniel D.
Crowley dated April 30, 1994 -- Exhibit 10.84; Registration Statement No.
33-80432;
E. Employment Agreement between Foundation Health Corporation and Steven D.
Tough dated April 22, 1994 -- Exhibit 10.86; Registration Statement No.
33-80432;
F. Employment Agreement between Foundation Health Corporation and Allen J.
Marabito dated April 22, 1994 -- Exhibit 10.88; Registration Statement
No. 33-80432;
G. Employment Agreement between Foundation Health Corporation and Jeffrey L.
Elder dated April 22, 1994 -- Exhibit 10.85; Registration Statement No.
33-80432;
H. Employment Agreement between Foundation Health Corporation and Kirk A.
Benson dated April 22, 1994 -- Exhibit 10.87; Registration Statement No.
33-80432;
I. Employee Stock Purchase Plan -- Exhibit 10.53; Registration Statement
No. 33-38867;
J. Amended and Restated Foundation Health Corporation Deferred Compensation
Plan -- Exhibit 10.99;
K. Foundation Health Corporation Supplemental Executive Retirement Plan, as
amended and restated -- Exhibit 10.100;
L. Foundation Health Corporation Executive Retiree Medical Plan, as amended
and restated -- Exhibit 10.101;
(b) Reports on Form 8-K. The following reports on Form 8-K were filed by the
Company during the fiscal quarter ended June 30, 1995:
None
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FOUNDATION HEALTH CORPORATION
By /s/ JEFFREY L. ELDER
-----------------------------------
Jeffrey L. Elder
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Dated: September , 1995
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Daniel D. Crowley, Allen J. Marabito and Patricia
A. Burgess, and each of them, his true and lawful attorneys in fact, each with
the power of substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys in fact, or his substitute or substitutes, may do or cause of be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ DANIEL D. CROWLEY Director, President and September 26,
- ----------------------------------- Chief Executive Officer 1995
Daniel D. Crowley (Principal Executive
Officer) and Chairman of
the Board
/s/ STEVEN D. TOUGH Director September 26,
- ----------------------------------- 1995
Steven D. Tough
/s/ JEFFREY L. ELDER Director, Senior Vice September 26,
- ----------------------------------- President -- Chief 1995
Jeffrey L. Elder Financial Officer
(Principal Financial and
Accounting Officer)
/s/ ROBERT ANDERSON Director September 26,
- ----------------------------------- 1995
Robert Anderson
/s/ DAVID A. BOGGS Director September 26,
- ----------------------------------- 1995
David A. Boggs
23
<PAGE>
<TABLE>
<C> <S> <C>
/s/ EARL B. FOWLER Director September 26,
- ----------------------------------- 1995
Earl B. Fowler
/s/ RICHARD W. HANSELMAN Director September 26,
- ----------------------------------- 1995
Richard W. Hanselman
/s/ ROSS D. HENDERSON, M.D Director September 26,
- ----------------------------------- 1995
Ross D. Henderson, M.D.
/s/ FRANK A. OLSON Director September 26,
- ----------------------------------- 1995
Frank A. Olson
/s/ RICHARD J. STEGEMEIER Director September 26,
- ----------------------------------- 1995
Richard J. Stegemeier
/s/ RAYMOND S. TROUBH Director September 26,
- ----------------------------------- 1995
Raymond S. Troubh
</TABLE>
24
<PAGE>
FOUNDATION HEALTH CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1994 AND 1995
25
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Foundation Health Corporation
We have audited the accompanying consolidated balance sheets of Foundation
Health Corporation and its subsidiaries (the "Company") as of June 30, 1994 and
1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended June 30,
1995. Our audits also included the financial statement schedules listed in the
index at Item 14(a)(2). These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits. The consolidated financial statements give
retroactive effect to the merger of Foundation Health Corporation and
CareFlorida Health Systems, Inc. on October 31, 1994, and to the merger of
Foundation Health Corporation and Thomas-Davis Medical Centers, P.C. on November
1, 1994, both of which have been accounted for using the pooling of interests
method of accounting as described in Note 1 to the consolidated financial
statements. We did not audit the balance sheets of Thomas-Davis Medical Centers,
P.C. as of December 31, 1992 and 1993, or the related statements of income,
stockholders' equity and cash flows for the years ended December 31, 1992 and
December 31, 1993, which statements reflect total assets of $174,705,000 and
$192,493,000 as of December 31, 1992 and 1993, respectively, and total revenues
of $317,672,000 and $419,283,000 for the respective years then ended. We also
did not audit the balance sheets of CareFlorida Health Systems, Inc. as of
December 31, 1992 and 1993, or the related statements of income, stockholders'
equity and cash flows for the years ended December 31, 1992 and December 31,
1993, which statements reflect total assets of $33,765,000 and $51,451,000 as of
December 31, 1992 and 1993, respectively, and total revenues of $112,474,000 and
$154,122,000 for the respective years then ended. Those financial statements
were audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to the amounts included for Thomas-Davis Medical
Centers, P.C. and CareFlorida Health Systems, Inc. for such periods, is based
solely on the reports of the other auditors. As described in Note 1 to the
consolidated financial statements, subsequent to the issuance of the reports of
the other auditors, the financial statements of Thomas-Davis Medical Centers,
P.C. and CareFlorida Health Systems, Inc. were restated to conform to the fiscal
year of Foundation Health Corporation for each of the two years in the period
ended June 30, 1994.
We conducted our audits in accordance with generally accepted auditing
standards. 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 and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Foundation Health Corporation and
its subsidiaries as of June 30, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1995 in conformity with generally accepted accounting principles. Also,
in our opinion, the financial statement schedules referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
We also audited the adjustments described in Note 1 that were applied to
restate the 1992 and 1993 financial statements of Thomas-Davis Medical Centers,
P.C. and CareFlorida Health Systems, Inc. In our opinion, such adjustments are
appropriate and have been properly applied.
DELOITTE & TOUCHE LLP
Sacramento, California
July 25, 1995
26
<PAGE>
FOUNDATION HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1994 1995
------------- -------------
<S> <C> <C>
Cash and cash equivalents........................................................... $ 165,209 $ 203,937
Investments:
Available for sale................................................................ 541,596
Held to maturity.................................................................. 49,745
Short-term investments............................................................ 25,094
Fixed maturities.................................................................. 575,269
Amounts receivable under government contracts....................................... 136,188 81,089
Reinsurance receivable.............................................................. 122,046 98,255
Premium and patient receivables, net of allowance for doubtful accounts of $12,300
and $11,915 at June 30, 1994 and 1995.............................................. 93,127 100,727
Property and equipment, net......................................................... 143,088 230,278
Goodwill and other intangible assets, net........................................... 105,535 409,342
Deferred income taxes............................................................... 44,534 65,673
Other assets........................................................................ 88,418 183,565
------------- -------------
$ 1,498,508 $ 1,964,207
------------- -------------
------------- -------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Reserves for claims, losses and loss adjustment expenses............................ $ 615,742 $ 700,281
Notes payable, capital leases, and other financing arrangements..................... 170,108 180,054
Amounts payable under government contracts.......................................... 50,953 47,584
Accrued dividends to policyholders.................................................. 30,026 16,405
Other liabilities................................................................... 209,236 262,984
------------- -------------
1,076,065 1,207,308
------------- -------------
Stockholders' equity
Common stock and additional paid-in capital, $.01 par value, 100,000,000 shares
authorized, 48,479,134 and 57,142,606 shares issued and outstanding at June 30,
1994 and 1995.................................................................... 264,976 518,671
Retained earnings................................................................. 194,800 244,249
Unrealized investment gains and losses, net of taxes.............................. (2,974)
Common stock held in treasury, at cost............................................ (37,333) (3,047)
------------- -------------
422,443 756,899
------------- -------------
$ 1,498,508 $ 1,964,207
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
27
<PAGE>
FOUNDATION HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------
1993 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Commercial premiums................................................ $ 1,102,392 $ 1,358,616 $ 1,664,509
Government contracts............................................... 746,827 542,726 187,493
Specialty services revenue......................................... 89,135 380,726 509,807
Patient service revenue, net....................................... 43,483 41,358 41,323
Investment and other income........................................ 24,874 39,511 56,792
------------- ------------- -------------
2,006,711 2,362,937 2,459,924
------------- ------------- -------------
Expenses:
Commercial health care services.................................... 862,602 1,067,027 1,290,367
Government contracts health care services.......................... 188,139 152,185 67,508
Government contracts subcontractor costs........................... 432,903 252,743 66,551
Specialty services costs........................................... 79,366 355,208 438,124
Patient service costs.............................................. 38,156 37,599 33,561
Selling, general and administrative................................ 230,506 291,130 307,802
Amortization and depreciation...................................... 21,388 28,463 41,102
Interest expense................................................... 4,239 12,709 11,555
Acquisition and restructuring costs................................ 12,413 124,822
------------- ------------- -------------
1,869,712 2,197,064 2,381,392
------------- ------------- -------------
Income before income taxes and minority interest..................... 136,999 165,873 78,532
Provision for income taxes......................................... 57,026 64,834 26,821
Minority interest.................................................. 6,636 7,398 2,262
------------- ------------- -------------
Net income........................................................... $ 73,337 $ 93,641 $ 49,449
------------- ------------- -------------
------------- ------------- -------------
Earnings per share................................................... $ 1.53 $ 1.92 $ 0.90
------------- ------------- -------------
------------- ------------- -------------
Weighted average common and common stock equivalent shares
outstanding......................................................... 47,840,576 48,688,221 54,780,162
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
28
<PAGE>
FOUNDATION HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
COMMON STOCK HELD IN TREASURY INVESTMENT
------------------------ ------------------------ RETAINED GAINS AND LOSSES,
SHARES AMOUNT SHARES AMOUNT EARNINGS NET OF TAXES TOTAL
------------ ---------- ------------ ---------- ---------- ----------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1992.... 45,283,177 $ 235,604 2,357,089 $ (1,994) $ 29,817 $ 263,427
Issuance of common stock --
net........................ 2,370,347 677 677
Exercise of stock options... 590,197 6,746 6,746
Purchase of treasury
stock...................... (1,024,624) 1,024,624 (7,673) (7,673)
Tax benefits related to
stock options exercised.... 5,884 5,884
Net income.................. 73,337 73,337
------------ ---------- ------------ ---------- ---------- ------- ----------
Balance at June 30, 1993.... 47,219,097 248,911 3,381,713 (9,667) 103,154 342,398
Issuance of common stock --
net........................ 2,087,971 1,627 1,627
Purchase of treasury
stock...................... (1,400,281) 1,400,281 (27,666) (27,666)
Exercise of stock options... 572,347 8,661 8,661
Assumption of stock
options.................... 367 367
Tax benefits related to
stock options exercised.... 5,410 5,410
Dividends paid by
predecessor company........ (1,995) (1,995)
Net income.................. 93,641 93,641
------------ ---------- ------------ ---------- ---------- ------- ----------
Balance at June 30, 1994.... 48,479,134 264,976 4,781,994 (37,333) 194,800 422,443
Cumulative effect of
adoption of SFAS No. 115,
net of taxes............... $ (9,019) (9,019)
Issuance of common stock.... 8,432,676 280,465 280,465
Purchase of treasury
stock...................... (100,000) 100,000 (3,047) (3,047)
Retirement of treasury
stock...................... (37,333) (4,781,994) 37,333
Exercise of stock options... 330,796 5,920 5,920
Tax benefits related to
stock options exercised.... 4,643 4,643
Net unrealized holding
gains...................... 6,045 6,045
Net income.................. 49,449 49,449
------------ ---------- ------------ ---------- ---------- ------- ----------
Balance at June 30, 1995.... 57,142,606 $ 518,671 100,000 $ (3,047) $ 244,249 $ (2,974) $ 756,899
------------ ---------- ------------ ---------- ---------- ------- ----------
------------ ---------- ------------ ---------- ---------- ------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
29
<PAGE>
FOUNDATION HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................... $ 73,337 $ 93,641 $ 49,449
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization and depreciation.............................................. 21,317 28,389 40,981
Amortization of bond discount.............................................. 83 3,719 5,396
Noncash restructuring costs................................................ 11,486
Change in assets and liabilities, net of effects from acquisition of
businesses:
Premium and patient receivables, net......................................... (9,792) 11,577 912
Reinsurance receivable....................................................... (6,589) 7,117 25,583
Other assets................................................................. (28,266) (40,164)
Amounts receivable/payable under government contracts........................ (2,029) (10,761) 51,730
Reserves for claims, losses and loss adjustment expenses..................... 25,280 18,071 59,638
Accrued dividends to policyholders........................................... 7,115 (13,621)
Other liabilities............................................................ 37,197 22,636 27,631
Deferred income taxes, net................................................... (18,917) (9,219) (17,265)
--------- --------- ---------
Net cash from operating activities............................................. 119,887 144,019 201,763
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale investments.................................. (765,510)
Sales and maturities of available for sale investments....................... 770,673
Purchases of held to maturity investments.................................... (39,112)
Maturities of held to maturity investments................................... 80,034
Purchases of short-term investments.......................................... (393,290) (367,253)
Sales and maturities of short-term investments............................... 379,807 435,201
Purchases of fixed maturity investments...................................... (478,169) (731,324)
Sales and maturities of fixed maturity investments........................... 357,671 641,404
Acquisition of property and equipment........................................ (29,071) (46,363) (107,257)
Increase in goodwill and other intangible assets............................. (13) (1,171) (42,126)
Increase in other assets..................................................... (5,852) (10,543) (35,376)
Acquisition of businesses, net of cash acquired.............................. (3,921) (62,545) (41,874)
--------- --------- ---------
Net cash used for investing activities......................................... (172,838) (142,594) (180,548)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable and capital leases....................... (19,668) (8,218) (16,451)
Proceeds from issuance of notes payable and capital leases................... 125,157 300 20,000
Proceeds from issuance of common stock -- net................................ 677 1,627 6,448
Proceeds from exercise of stock options...................................... 6,746 8,661 5,920
Tax benefits related to stock options........................................ 5,884 5,410 4,643
Purchase of treasury stock, net.............................................. (7,673) (27,666) (3,047)
Dividends paid by predecessor company........................................ (1,995)
--------- --------- ---------
Net cash from (used for) financing activities.................................. 111,123 (21,881) 17,513
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........................... 58,172 (20,456) 38,728
Cash and cash equivalents, beginning of year................................... 127,493 185,665 165,209
--------- --------- ---------
Cash and cash equivalents, end of year......................................... $ 185,665 $ 165,209 $ 203,937
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL CASH FLOWS DISCLOSURE:
Interest paid................................................................ $ 4,793 $ 14,004 $ 13,907
Income taxes paid............................................................ 47,687 64,426 47,792
Noncash investing and financing activities:
Capital lease obligations.................................................. 5,407 2,378
Deferred compensation...................................................... 3,789 5,383 5,429
Acquisition of businesses:
Assets acquired.......................................................... 4,382 532,331 392,509
Liabilities assumed...................................................... (381) (439,740) (49,506)
Issuance of notes payable and amounts held in escrow..................... (4,359) (7,909)
Issuance of common stock................................................. (274,017)
--------- --------- ---------
Cash paid................................................................ 4,001 88,232 61,077
Fees and expenses........................................................ 116
Less cash acquired....................................................... (196) (25,687) (19,203)
--------- --------- ---------
Net cash paid............................................................ $ 3,921 $ 62,545 $ 41,874
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
30
<PAGE>
FOUNDATION HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS
Foundation Health Corporation (the "Company") operates an integrated
multi-state managed care organization. The Company's operations are focused on
its commercial Health Maintenance Organization ("HMO") and Preferred Provider
Organization ("PPO") operations, government-sponsored managed care programs, and
specialty services operations.
The Company's commercial HMO subsidiaries contract to provide medical care
services to a defined, enrolled population for a predetermined, prepaid monthly
fee for group, Medicaid, individual and Medicare HMO plans throughout their
respective service areas. All of the HMOs are state licensed and some are also
federally qualified.
The Company's wholly-owned subsidiary, Foundation Health Federal Services,
Inc. ("Federal Services"), administers large, multi-year managed care government
contracts. Federal Services was the prime contractor pursuant to the CHAMPUS
Reform Initiative ("CRI") under the CRI Contract which commenced on February 1,
1988 to implement a program to provide health care services to CHAMPUS
beneficiaries in California and Hawaii. Federal Services subcontracted with the
Company's California HMO in northern and central California and other health
care providers in southern California and Hawaii for the delivery of health care
services in their respective designated service areas. The contract expired
January 31, 1994 with a wind-down and termination period after expiration. In
June 1991, Federal Services entered into a five-year agreement with the
Department of Defense ("DoD") to develop, implement and operate managed health
care programs for CHAMPUS beneficiaries in New Orleans, Louisiana, which in May
1993 was expanded to cover additional beneficiaries in other parts of Louisiana
and Texas. In September 1994, the Company was awarded a similar contract to
cover beneficiaries in Oregon and Washington which commenced health care
delivery on March 1, 1995 and, in April 1995, the Company was awarded an
additional contract for beneficiaries in Oklahoma, Arkansas, Louisiana and Texas
with health care delivery scheduled to commence in November 1995. In August 1995
Federal Services was awarded a five year contract to provide services to CHAMPUS
beneficiaries in California and Hawaii.
The Company's specialty services subsidiaries offer managed care products
related to behavioral health, dental, vision, pharmaceutical products and
services, and workers' compensation insurance, administration and cost
containment. The Company's largest specialty services subsidiary, California
Compensation Insurance Company ("CalComp"), acquired in August 1993, is
primarily engaged in writing workers' compensation insurance in California.
CalComp enables the Company to utilize its managed care capabilities and
provider networks to reduce the medical costs associated with workers'
compensation claims and provides the Company with the ability to market "24
hour" risk products covering employees for medical care both on and off the job.
The Company operates and manages Company-owned and leased health care
centers in California, Arizona and Florida which provide primary and
multi-specialty care to enrolled members. Physicians employed by professional
corporations which are owned by Company-affiliated physicians provide services
to the Company's members at the health care centers. The Company provides
facilities and support functions to the health care centers and is reimbursed in
the form of a management fee by the affiliated professional corporations.
The Company owns and operates two hospitals, the East Los Angeles Doctors
Hospital, a 128-bed general hospital located in East Los Angeles, California and
the Memorial Hospital of Gardena, a 200-bed general hospital located in Gardena,
California (the "Hospitals"). The health care services provided by the Hospitals
are general medical and surgical services, subacute, pediatrics, intensive
31
<PAGE>
FOUNDATION HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- DESCRIPTION OF BUSINESS (CONTINUED)
and coronary care, physical therapy, respiratory care and emergency room
services. The Hospitals received approximately 76.7% of their revenues from
Medicare and Medicaid programs during the year ended June 30, 1995.
CONSUMMATED BUSINESS ACQUISITIONS -- POOLING TRANSACTIONS
In October 1992, 505,372 shares of the Company's common stock were issued in
exchange for all of the outstanding common stock of Occupational Health
Services, Inc. ("OHS"). OHS provides employee assistance and other managed care
behavioral health and substance abuse programs on both a prepaid and self-funded
basis to employers, governmental entities and other payors.
In October 1992, 5,041,376 shares of the Company's common stock were issued
in exchange for all of the outstanding common stock of Century MediCorp, Inc.
("CMC"). In addition, all outstanding CMC options were exchanged for options to
purchase 303,520 shares of the Company's common stock. CMC owned three HMOs and
the Hospitals in Southern California. In December 1992, CMC merged into the
Company, and by March 1993, CMC's HMO subsidiaries had merged into one of the
Company's HMO subsidiaries.
In connection with the acquisitions of CMC and OHS, the Company charged
$12,413,000 to operations during the year ended June 30, 1993 for acquisition
and restructuring costs. These costs consist of $4,690,000 relating to the
integration and restructuring of the combined entities, $4,533,000 in direct
transaction costs (primarily professional fees) and $3,190,000 in contract
terminations. The integration and restructuring costs consisted primarily of the
disposition of duplicate computer hardware and software, costs of integrating
membership and claims functions, personnel related costs and costs associated
with closing or relocating duplicate facilities.
These mergers have been accounted for as poolings of interests and
accordingly, the accompanying consolidated financial statements and notes
thereto have been restated to include the accounts of CMC and OHS for all
periods presented.
On October 31, 1994, 6,862,051 shares of the Company's common stock were
issued in exchange for all of the outstanding common stock of CareFlorida Health
Systems, Inc. ("CareFlorida"). At the time of acquisition, CareFlorida provided
comprehensive health care services to approximately 143,000 members in Florida
through its HMO and PPO subsidiaries.
On November 1, 1994, 13,124,027 shares of the Company's common stock were
issued in exchange for all of the outstanding common stock of Thomas-Davis
Medical Centers, P.C. ("TDMC"), including its majority interest of 60.5% of the
outstanding common stock of Intergroup Healthcare Corporation ("Intergroup").
Additionally, 7,577,336 shares were issued for the purchase of the remaining
39.5% minority interest of Intergroup. All outstanding Intergroup options were
exchanged for options to purchase 500,290 shares of the Company's common stock.
TDMC employed approximately 190 physicians at the date of merger who provided
health care services to patients in Arizona through 15 primary care centers,
five urgent care centers, two behavioral health centers and one surgery center.
At the time of merger, Intergroup provided comprehensive health care services to
approximately 379,000 HMO and life and accident insurance members and 104,000
PPO members primarily in Arizona and Utah.
In connection with the mergers of CareFlorida, TDMC and Intergroup, the
Company recorded a charge for integration, restructuring and pooling costs of
$124.8 million.
32
<PAGE>
FOUNDATION HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- DESCRIPTION OF BUSINESS (CONTINUED)
The acquisition and restructuring charge represents the costs of acquiring
and consolidating the companies' management information systems and
administrative functions and positioning the Company to take advantage of best
practices in healthcare delivery systems and managed care techniques after the
mergers.
The components of this charge include (in millions):
<TABLE>
<S> <C>
Professional fees....................................................... $ 21.5
Cancellation of certain contractual obligations and other settlement
costs.................................................................. 27.1
Write-off of certain redundant hardware, software and other settlement
costs.................................................................. 17.9
Elimination of duplicate facilities..................................... 13.0
Transition and severance related payments to employees.................. 36.5
Other integration and restructuring..................................... 8.8
------
Total............................................................... $124.8
------
------
</TABLE>
These costs satisfy the definition of "exit costs" as set forth in Emerging
Issues Task Force Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)," that are directly related to the mergers.
Management of the Company anticipates the integration and restructuring of the
combined entities will be substantially complete by the end of the fourth
quarter of fiscal year 1996.
Full implementation of the restructuring plan will result in the termination
of 638 employees (291 employees had been terminated as of June 30, 1995) by
eliminating and consolidating duplicate administrative, information systems and
sales functions.
As of June 30, 1995, $62.8 million (primarily professional fees, transition
and related severance payments and write-off of impaired assets) in merger,
integration and restructuring costs have been paid or otherwise charged against
the $124.8 million accrual. The remaining restructuring obligations are expected
to be substantially paid as due through the fourth quarter of fiscal year 1996
utilizing existing cash resources of the Company. The amounts set forth above
represent management's best estimate of the restructuring costs to be incurred
and the timing of the restructuring and integration plan (the "Plan"). The
progress of the Plan and the actual amounts incurred could vary from these
estimates if future developments differ from the underlying assumptions used by
management in developing the recorded accrual.
In accordance with the pooling of interests method of accounting the
Company's consolidated financial statements and notes thereto have been restated
to include the accounts of TDMC (including its 60.5% interest in Intergroup) and
CareFlorida for all periods presented. Prior to the mergers, CareFlorida and
TDMC each reported on a calendar year basis. Accordingly, the consolidated
financial
33
<PAGE>
FOUNDATION HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- DESCRIPTION OF BUSINESS (CONTINUED)
statements include CareFlorida's and TDMC's financial statements restated to the
Company's fiscal year basis. Separate and combined results of the Company,
CareFlorida and TDMC for the periods prior to consummation of the mergers are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
<S> <C> <C>
1993 1994
------------- -------------
Revenues:
Foundation Health Corporation -- as previously reported................. $ 1,517,339 $ 1,717,821
TDMC -- year ended December 31, 1992 and 1993........................... 317,672 419,283
CareFlorida -- year ended December 31, 1992 and 1993.................... 112,474 154,122
Adjustments (1)......................................................... 59,226 71,711
------------- -------------
Combined.................................................................. $ 2,006,711 $ 2,362,937
------------- -------------
------------- -------------
Net income:
Foundation Health Corporation -- as previously reported................. $ 61,908 $ 82,153
TDMC -- year ended December 31, 1992 and 1993........................... 5,134 4,841
CareFlorida -- year ended December 31, 1992 and 1993.................... 2,701 6,664
Adjustments (1)......................................................... 3,594 (17)
------------- -------------
Combined.................................................................. $ 73,337 $ 93,641
------------- -------------
------------- -------------
<FN>
(1) Primarily reflects adjustments to calendar year results to conform to
the Company's fiscal year reporting and certain reclassifications to
conform to the Company's presentation.
</TABLE>
CONSUMMATED BUSINESS ACQUISITIONS -- PURCHASE TRANSACTIONS
In August 1992, the Company acquired all of the outstanding common stock of
American Citizens Life Insurance Company, now named Foundation Health National
Life Insurance Company ("National Life"), a life and accident insurance company
currently licensed in 16 states, for the purchase price of $2,171,000, paid in
cash, which represented the fair market value of net assets of the acquired
company as of the closing of the transaction, as well as intangible assets
totaling $450,000.
In October 1992, the Company acquired all of the outstanding common stock of
AVP Vision Plans, a vision HMO, for the purchase price of $1,020,000, paid in
cash, which resulted in goodwill of $912,000.
In July 1993, the Company acquired all of the outstanding common stock of
Managed Alternative Care, a subacute care management company, for $6,000,000,
paid in cash, which resulted in goodwill of $5,500,000.
In August 1993, the Company acquired all of the outstanding common stock of
Business Insurance Corporation ("BICO"), a holding company primarily engaged in
writing workers' compensation insurance in California through its wholly-owned
subsidiary, CalComp, for $65,268,000, paid in cash. In addition, all outstanding
BICO options were exchanged for options to purchase 29,475 shares of the
Company's common stock. The acquisition resulted in goodwill of $5,001,000.
In April 1994, the Company completed the acquisition of substantially all of
the outstanding shares of common stock of Gem Holding Corporation ("Gem"), a
holding company primarily engaged in writing health, individual life, annuities,
group life, disability and dental insurance. At the date of acquisition, Gem
provided services to approximately 83,000 individuals in six western states. The
purchase price was $17,800,000 which was paid in cash. The acquisition resulted
in goodwill of approximately $4,500,000. The effective date of the acquisition
was January 1, 1994.
34
<PAGE>
FOUNDATION HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- DESCRIPTION OF BUSINESS (CONTINUED)
In April 1994, the Company acquired all of the outstanding common stock of
Premier Medical Network ("Premier"). Premier provides third party administrative
services to approximately 98,000 individuals through a PPO network in Utah. The
purchase price was $1,500,000, paid in cash. The acquisition resulted in
goodwill of $1,200,000.
In July 1994, the Company acquired all of the outstanding common stock of
The Noetics Group and all of the assets of Reviewco for consideration consisting
of the issuance of 378,358 shares of the Company's common stock valued at $16
million, 118,236 shares of common stock valued at $5 million, which was placed
in escrow and cash of $16 million. The release of the escrow shares is subject
to the attainment of certain profitability targets by Reviewco. The acquisition
resulted in goodwill of $27,773,000. The Noetics Group provides workers'
compensation third party administration services for self-funded employers.
Reviewco operates a medical bill review and cost-containment business for the
workers' compensation industry.
In November 1994, the Company acquired all of the outstanding common stock
of Southern Colorado Health Plan, Inc. ("SCHP"), and its parent corporation for
consideration consisting of 241,672 shares of the Company's common stock valued
at $8,900,000. The acquisition resulted in goodwill of $6,755,000. At the date
of acquisition, SCHP provided health care services to 7,100 members through its
HMO based in Pueblo, Colorado.
In November 1994, the Company acquired all of the outstanding common stock
of Community Medical Plan, Inc. ("CMP") and certain affiliated health care
centers for consideration of $32.9 million, consisting of $25 million in paid
cash and at closing the issuance of promissory notes of $7.9 million due
November 15, 1995. At the date of acquisition, CMP served approximately 25,000
Medicaid beneficiaries in Florida. The acquisition resulted in goodwill of
$32,752,000.
In November 1994, the Company issued 7,577,336 shares of its common stock
for the purchase of 39.5% of the outstanding common stock of Intergroup (the
"Intergroup Minority Interest"). The acquisition of the Intergroup Minority
Interest, which was accounted for as a purchase, was valued at $249,109,000 and
resulted in goodwill of $207,371,000. The unaudited pro forma combined total
revenues, net income and earnings per share of the Company and the Intergroup
Minority Interest, assuming the Company had acquired the Intergroup Minority
Interest on July 1, 1993, are as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED JUNE 30,
----------------------
1994 1995
---------- ----------
<S> <C> <C>
Total revenues................................................................. $ 2,362.9 $ 2,459.9
---------- ----------
---------- ----------
Net income..................................................................... $ 96.9 $ 50.6
---------- ----------
---------- ----------
Earnings per share............................................................. $ 1.74 $ 0.89
---------- ----------
---------- ----------
</TABLE>
This unaudited pro forma information reflects the elimination of the
Intergroup Minority Interest and the amortization of the goodwill related to the
purchase of the Intergroup Minority Interest. The unaudited pro forma results of
operations are not necessarily indicative of the combined results that would
have occurred had the acquisition taken place on July 1, 1993, nor are they
necessarily indicative of results that may occur in the future.
Effective January 1, 1995, CalComp acquired a 50-state licensed property and
casualty company for an aggregate purchase price of $13,201,000, consisting of
the fair market value of investments and
35
<PAGE>
FOUNDATION HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- DESCRIPTION OF BUSINESS (CONTINUED)
intangible assets which was paid in cash at closing. This company had no
insurance business in force at closing and will enable CalComp to geographically
expand its managed care workers' compensation products. No goodwill was recorded
as a result of this transaction.
The above acquisitions have been accounted for under the purchase method of
accounting and accordingly, the operations of these companies have been included
in the Company's consolidated financial statements from their respective dates
of acquisition.
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 subsidiaries. All significant intercompany transactions
have been eliminated in consolidation. The accompanying consolidated financial
statements have been restated for the mergers accounted for as poolings of
interests as discussed in Note 1.
REVENUE RECOGNITION
Commercial premium revenue includes HMO 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 premium.
Revenue under government contracts is recognized in the month in which the
eligible beneficiaries are entitled to health care services. Certain government
contracts also contain cost and performance incentive provisions which adjust
the contract price based on actual performance, and revenue under certain
contracts is subject to price adjustments attributable to inflation and other
factors. The effects of these adjustments are recognized on a monthly basis.
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.
Specialty services revenue is recognized in the month in which the
administrative services are performed or the period that coverage for service is
provided. Workers' compensation premium revenue is recognized ratably over the
period to which the premium relates. The insurance policies currently written by
the Company are for a period of one year or less. Billed premium in excess of
premiums earned represents the liability for unearned premium. Premiums earned
include an estimate for earned but unbilled premiums.
Patient service revenue is recorded on the accrual basis in the period in
which services are provided at established rates regardless of whether
collection in full is anticipated. Contractual and charitable allowances, the
results of other arrangements for providing services at less than established
rates and the provision for doubtful accounts are reported as deductions from
patient service revenue. Contractual allowances include differences between
established billing rates and amounts estimated by management as recoverable in
accordance with reimbursement rates in effect. Differences between final
settlements and amounts accrued in previous years are reported as adjustments to
the current year's provision for contractual allowance.
Unearned premiums related to commercial and specialty services lines of
business totaled $31,778,000 and $64,930,000 at June 30, 1994 and 1995 and are
included in other liabilities on the consolidated balance sheet.
36
<PAGE>
FOUNDATION HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESERVES FOR CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES AND HEALTH CARE
SERVICES EXPENSES
Except as discussed below, reserves for claims, losses and loss adjustment
expenses and health care services expenses are based upon the accumulation of
cost estimates for unpaid claims and losses reported prior to the close of the
accounting period, together with a provision for the current estimate of the
probable cost of claims, losses and loss adjustment expenses that have occurred
but have not yet been reported. Such estimates are based on many variables
including individual cases for reported losses, estimates of unreported losses
using historical and statistical information and other factors. Workers'
compensation claims, losses and loss adjustment expenses, and specialty health
care services expenses are included in specialty services costs in the
statements of operations. The methods for making the estimates and for
establishing the resulting reserves are continually reviewed and updated, and
any adjustments resulting therefrom 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 provided. While the
ultimate amount of claims and losses and the related expenses paid are dependent
on future developments, management is of the opinion that the reserves for
claims, losses and loss adjustment expenses is adequate to cover such claims,
losses and expenses. These liabilities are reduced by estimated amounts
recoverable from third parties for subrogation.
The Company has capitation contracts with individual practice associations,
medical groups and hospitals ("Capitated Providers") to provide medical care
services to enrollees. The Capitated Providers are at risk for the cost of
medical care services provided to the Company's enrollees in the relevant
geographic areas; however, the Company is ultimately responsible for the
provision of services to its enrollees should the Capitated Providers be unable
to provide the contracted services. Certain Capitated Providers also provide
claims processing and other administrative services. The Capitated Providers are
either paid a fixed percentage of premiums collected in the geographic areas
they service or a fixed amount per enrollee for enrollees in their respective
service areas. Medical care expenses relating to these Capitated Providers are
included in commercial health care services expense and amounted to
$318,349,000, $398,700,000 and $467,735,000 for the years ended June 30, 1993,
1994 and 1995.
The HMOs also contract with hospitals, physicians and other providers of
health care, pursuant to discounted fee for service arrangements and hospital
per diems under which providers bill the HMOs for each individual service
provided to enrollees.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include investments with original maturities of
three months or less.
INVESTMENTS
Prior to July 1, 1994, the Company classified its securities as short-term
investments and fixed maturities. Securities with an original maturity of one
year or less at the date of acquisition were classified as short-term
investments. Such investments were carried at cost, which approximated market
value. Declines in market value which were determined by management to be other
than temporary were recorded as charges to the statement of operations.
Investments with fixed maturities primarily included long-term investment grade
bonds and were carried at amortized cost. It is the Company's policy to invest
in notes, bonds and money market securities, limited by certain restrictions.
The cost of investments sold is determined using the specific identification
method.
37
<PAGE>
FOUNDATION HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Effective July 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The adoption of SFAS No. 115 did not have a
material effect on the Company's consolidated financial position or results of
operations.
In accordance with SFAS No. 115, the Company classifies investments held by
trustees or agencies pursuant to state regulatory requirements as held to
maturity based on the Company's ability and intent to hold these investments to
maturity. Such investments are presented at amortized cost. All other
investments are classified as available for sale and are reported at fair value
based on quoted market prices, with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders' equity, net of
income tax effects. For purposes of calculating realized gains and losses on the
sale of investments available for sale, the amortized cost of each investment
sold is used. The Company has no trading securities.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is provided using
the straight-line method for all assets over their estimated useful lives as
follows:
<TABLE>
<S> <C>
Buildings and improvements.............................................. 5-40 years
Furniture and equipment................................................. 3-10 years
</TABLE>
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, recorded cost and 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 consists primarily of goodwill and
other intangibles which arise as a result of various business acquisitions and
the acquisition of the Company through a leveraged buy-out on December 30, 1986,
at which time the assets and liabilities of the Company were recorded at their
appraised values. In addition, the Company's policy is to defer direct and
incremental preoperating costs related to its HMO subsidiaries' geographic
expansion and the opening of health care centers. These costs are deferred prior
to the commencement of significant operations at which time the Company begins
amortizing such costs over a three-year period. Goodwill and other intangible
assets are amortized using the methods listed below over appropriate periods not
exceeding 40 years. Fully amortized intangible assets and related accumulated
amortization are removed from the accounts. The Company evaluates the carrying
value of it intangible assets at each balance sheet date.
Goodwill and other intangible assets are amortized as follows:
<TABLE>
<CAPTION>
LIFE METHOD
-------------------------------- ---------------------
<S> <C> <C>
Subscribers.................................... 22 years Declining balance
Employer group contracts....................... 22 years Straight line
Goodwill....................................... 22-40 years Straight line
Organization and preoperating costs............ 3-8 years Straight line
Noncompetition and employment agreements....... Term of related agreement Straight line
Debt issue costs............................... Term of related debt Straight line
</TABLE>
38
<PAGE>
FOUNDATION HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill of $62,520,000 and $330,503,000 at June 30, 1994 and 1995, net of
accumulated amortization of $33,226,000 and $49,138,000 at June 30, 1994 and
1995, is included in goodwill and other intangible assets.
The Company intends to adopt Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of" ("FAS No. 121") during the year ending June 30, 1996.
Adoption of FAS No. 121 will not have a significant effect on the Company's
consolidated financial statements.
INCOME TAXES
The Company accounts for income taxes using the liability method. Deferred
income tax assets and liabilities result from temporary differences between the
tax basis of assets and liabilities and their reported amounts in the
consolidated financial statements that will result in taxable or deductible
amounts in future years.
The Company adopted SFAS No. 109, "Accounting for Income Taxes" effective
July 1, 1993. The adoption of SFAS No. 109 did not have a significant effect on
the Company's results of operations for the periods presented. No valuation
allowance resulted from the adoption of SFAS No. 109.
DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs, including commissions, premium taxes and other
acquisition costs related to the production or renewal of workers' compensation
and indemnity business, are deferred. Such costs are amortized as the related
premiums are earned. If it is determined that future policy revenues on existing
insurance contracts are not adequate to cover related losses and expenses,
deferred policy acquisition costs are written down. However, to date, no
write-downs have been made. Earnings on invested funds between the time of
premium receipts and related claim payments are considered in determining
whether a premium deficiency exists. Deferred policy acquisition costs totaled
$14,743,000 and $20,824,000 at June 30, 1994 and 1995 and are included in other
assets.
DIVIDENDS TO POLICYHOLDERS
Dividends to workers' compensation policyholders are generally declared 18
months after expiration of the policies. A provision is made for estimated
dividends to be paid related to premium revenue recognized.
EARNINGS PER SHARE
Earnings per share is calculated by dividing net income by the weighted
average number of shares of common stock plus common stock equivalent shares
outstanding using the treasury stock method. Earnings per share has been
restated for all periods presented to reflect the mergers of CMC, OHS,
CareFlorida and TDMC accounted for as poolings of interests as discussed in Note
1.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current year
presentation.
39
<PAGE>
FOUNDATION HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- INVESTMENTS
The amortized cost and market value of fixed maturity investments as of June
30, 1994, were as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. government and agencies......................... $ 115,338 $ 108 $ (3,791) $ 111,655
Obligations of states and other political
subdivisions........................................ 449,173 2,455 (12,595) 439,033
Corporate debt securities............................ 9,444 137 (502) 9,079
Certificates of deposit.............................. 1,314 1,314
----------- ----------- ---------- -----------
$ 575,269 $ 2,700 $ (16,888) $ 561,081
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
</TABLE>
As of June 30, 1995, the amortized cost, gross unrealized holding gains and
losses and fair value of the Company's investments were as follows (in
thousands):
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. government and agencies......... $108,951 $ 643 $(1,256) $108,338
Obligations of states and other
political subdivisions.............. 385,827 580 (4,231) 382,176
Corporate debt securities............ 8,120 119 (267) 7,972
Equity securities.................... 4,089 39 (170) 3,958
Other debt securities................ 39,152 39,152
--------- ---------- ---------- --------
Total................................ $546,139 $1,381 $(5,924) $541,596
--------- ---------- ---------- --------
--------- ---------- ---------- --------
<CAPTION>
HELD TO MATURITY
---------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U.S. government and agencies......... $17,263 $224 $ (45) $17,442
Obligations of states and other
political subdivisions.............. 27,703 79 (249) 27,533
Corporate debt securities............ 845 111 956
Equity securities....................
Other debt securities................ 3,934 3,934
--------- ----- ---------- -------
Total................................ $49,745 $414 $(294) $49,865
--------- ----- ---------- -------
--------- ----- ---------- -------
</TABLE>
At June 30, 1995, the contractual maturities of the Company's investments
were as follows (in thousands):
<TABLE>
<CAPTION>
AT AMORTIZED COST AT FAIR MARKET VALUE
-------------------------------------------- --------------------------------------------
YEARS TO MATURITY YEARS TO MATURITY
-------------------------------------------- --------------------------------------------
LESS THAN 1 TO 5 5 TO 10 OVER 10 LESS THAN 1 TO 5 5 TO 10 OVER 10
1 YEAR YEARS YEARS YEARS 1 YEAR YEARS YEARS YEARS
----------- --------- --------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. government and agencies........ $ 30,877 $ 63,346 $ 14,532 $ 197 $ 30,671 $ 62,781 $ 14,677 $ 209
Obligations of states and other
political subdivisions............. 41,212 101,674 136,709 106,231 41,141 101,075 134,250 105,709
Corporate debt securities........... 403 4,198 2,814 705 408 4,116 2,761 688
Equity securities................... 4,089 3,958
Other debt securities............... 39,152 39,152
----------- --------- --------- --------- ----------- --------- --------- ---------
Total............................... $ 115,733 $ 169,218 $ 154,055 $ 107,133 $ 115,330 $ 167,972 $ 151,688 $ 106,606
----------- --------- --------- --------- ----------- --------- --------- ---------
----------- --------- --------- --------- ----------- --------- --------- ---------
HELD TO MATURITY
U.S. government and agencies........ $ 4,468 $ 11,979 $ 817 $ 4,467 $ 12,095 $ 880
Obligations of states and other
political subdivisions............. 8,762 8,869 6,355 $ 3,717 8,758 8,852 6,289 $ 3,635
Corporate debt securities........... 247 300 297 270 341 344
Other debt securities............... 3,784 50 100 3,784 50 100
----------- --------- --------- --------- ----------- --------- --------- ---------
Total held to maturity.............. $ 17,014 $ 21,145 $ 7,572 $ 4,014 $ 17,009 $ 21,267 $ 7,610 $ 3,979
----------- --------- --------- --------- ----------- --------- --------- ---------
----------- --------- --------- --------- ----------- --------- --------- ---------
</TABLE>
40
<PAGE>
FOUNDATION HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- INVESTMENTS (CONTINUED)
Proceeds from the sales and maturities of fixed maturity investments during
1994 were $641,404,000, resulting in gross realized gains and losses of $173,000
and $267,000, respectively.
Proceeds from sales and maturities of available for sale securities during
1995 were $770,673,000, resulting in gross realized gains and losses of $13,000
and $122,000, respectively.
The Company's regulated subsidiaries are required to keep securities on
deposit in various states where they are licensed. At June 30, 1995,
$364,900,000 in securities are restricted to satisfy various state regulatory
and licensing requirements. Additionally, at June 30, 1995, $5,600,000 in
securities were pledged as collateral under reinsurance agreements.
Investment income, including realized investment gains and losses, were as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------
<S> <C> <C>
1994 1995
--------- ---------
Short-term investments........................................................... $ 3,035 $
Fixed maturities................................................................. 26,832
Available for sale............................................................... 31,938
Held to maturity................................................................. 3,283
Other............................................................................ 6,096 7,763
Less-investment expenses......................................................... (991) (534)
--------- ---------
Net investment income............................................................ $ 34,972 $ 42,450
--------- ---------
--------- ---------
</TABLE>
Investment income for the year ended June 30, 1993 primarily related to
fixed maturity investments.
NOTE 4 -- LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the reserves for losses and loss adjustment expenses related to
workers' compensation policies for the eleven months from date of acquisition to
June 30, 1994 and the year ended June 30, 1995 is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1994 JUNE 30, 1995
------------- -------------
<S> <C> <C>
Beginning balance......................................................... $ 358,645 $ 395,846
Less-ceded losses and loss adjustment expense reserves.................... (112,492) (103,318)
------------- -------------
Net beginning balance..................................................... 246,153 292,528
------------- -------------
Incurred related to:
Current fiscal year..................................................... 170,817 232,643
Prior fiscal years...................................................... 665 (7,614)
------------- -------------
Total incurred............................................................ 171,482 225,029
------------- -------------
Paid related to:
Current fiscal year..................................................... (37,597) (41,092)
Prior fiscal years...................................................... (87,510) (143,802)
------------- -------------
Total paid................................................................ (125,107) (184,894)
------------- -------------
Net ending balance........................................................ 292,528 332,663
Plus-ceded losses and loss adjustment expense reserves.................... 103,318 81,667
------------- -------------
Balance at June 30, 1994 and 1995, respectively........................... $ 395,846 $ 414,330
------------- -------------
------------- -------------
</TABLE>
41
<PAGE>
FOUNDATION HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- LOSSES AND LOSS ADJUSTMENT EXPENSES (CONTINUED)
During the fiscal year ended June 30, 1995, the Company experienced
favorable loss and loss adjustment expense reserve development of $7,614,000.
This reduction of the estimated loss and loss adjustment expense is primarily
related to the re-estimated liability for the 1993 and 1994 accident years.
NOTE 5 -- EXCESS LIABILITY INSURANCE AND REINSURANCE
Under reinsurance agreements, the Company reinsures certain workers'
compensation risks to other insurance companies. Reinsurance contracts do not
relieve the Company from its obligations to policyholders. Failure of reinsurers
to honor their obligations could result in losses to the Company; consequently,
allowances are established for amounts deemed uncollectible. The Company
regularly evaluates the financial condition of its reinsurers. Based on this
evaluation, management believes the reinsurers are creditworthy and that any
potential losses on these agreements will not have a material impact on the
consolidated financial statements. In addition, the Company maintains letters of
credit or trust agreements with each unauthorized reinsurer in the event that
the unauthorized reinsurer is unable to meet its obligations.
The Company maintains specific excess reinsurance on workers' compensation
which provides coverage in excess of $500,000 per incident for policy years 1994
and forward, in excess of $350,000 per incident for policy years 1992 and 1993
and in excess of $250,000 per incident for policy years 1989 through 1991. The
agreements provide coverage up to a maximum of $60 million per incident,
including the Company's retention. In addition, the Company also maintained a
pro rata reinsurance agreement wherein the reinsurer assumed a proportional
amount of net premiums written and related losses. The quota share percentage
ranged from 5% to 40% (5% at June 30, 1994) during the year ended June 30, 1994.
As of July 1, 1994 the quota share agreement was terminated.
The effect of reinsurance on workers' compensation premium written and
earned, and losses incurred for the eleven months from August 1, 1993 (date of
acquisition) to June 30, 1994 and the year ended June 30, 1995 is as follows (in
thousands):
<TABLE>
<CAPTION>
PREMIUMS PREMIUMS LOSSES
WRITTEN EARNED INCURRED
----------- ----------- -----------
<S> <C> <C> <C>
Eleven months ended June 30, 1994
Direct........................................................... $ 307,913 $ 309,379 $ 199,854
Assumed.......................................................... 20 16 (1,356)
Ceded............................................................ (32,122) (35,448) (27,016)
----------- ----------- -----------
Net.............................................................. $ 275,811 $ 273,947 $ 171,482
----------- ----------- -----------
----------- ----------- -----------
Year ended June 30, 1995
Direct........................................................... $ 370,408 $ 373,954 $ 215,674
Assumed.......................................................... 4,423 4,393 973
Ceded............................................................ (19,396) (20,296) 8,382
----------- ----------- -----------
Net.............................................................. $ 355,435 $ 358,051 $ 225,029
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
At June 30, 1995, the Company has an aggregate recoverable for workers'
compensation losses, paid and unpaid, including incurred but not reported, loss
adjustment expenses, and unearned premiums with a carrying value of $86,272,000
with a single reinsurer.
42
<PAGE>
FOUNDATION HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- EXCESS LIABILITY INSURANCE AND REINSURANCE (CONTINUED)
The Company's HMO subsidiaries purchase individual excess liability
insurance for hospital costs in excess of deductible amounts. Premiums for this
insurance are included in commercial health care services expense. Amounts
recoverable under such contracts are included as reductions of commercial health
care services expense.
NOTE 6 -- PROPERTY AND EQUIPMENT
Property and equipment comprised the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Land.......................................................................... $ 24,078 $ 29,840
Construction in progress...................................................... 2,527 22,362
Buildings and improvements.................................................... 65,908 106,450
Furniture and equipment....................................................... 125,109 168,075
----------- -----------
217,622 326,727
Less -- accumulated depreciation.............................................. (74,534) (96,449)
----------- -----------
$ 143,088 $ 230,278
----------- -----------
----------- -----------
</TABLE>
Depreciation expense on property and equipment was $14,856,000, $20,450,000
and $25,190,000 for the years ended June 30, 1993, 1994 and 1995.
NOTE 7 -- NOTES PAYABLE, CAPITAL LEASES AND OTHER FINANCING ARRANGEMENTS
Notes payable, capital leases and other financing arrangements comprised the
following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
7 3/4% Senior Notes due June 1, 2003.......................................... $ 124,545 $ 124,596
Capital lease obligations..................................................... 10,319 6,854
Unsecured notes payable pursuant to business acquisition, bearing interest at
4.167% due November 15, 1995 (Note 1)........................................ 7,909
Unsecured revolving line of credit bearing interest at 6.313% at June 30,
1995......................................................................... 20,000
Other......................................................................... 25,145 5,167
----------- -----------
160,009 164,526
Deferred compensation (Note 10)............................................... 10,099 15,528
----------- -----------
$ 170,108 $ 180,054
----------- -----------
----------- -----------
</TABLE>
In June 1993, the Company issued $125,000,000 of senior notes due June 1,
2003 ("Senior Notes"). The Senior Notes bear interest at 7 3/4% which is due
semi-annually on December 1 and June 1. The Notes are general unsecured
obligations of the Company, will rank PARI PASSU with all future unsecured and
unsubordinated indebtedness of the Company and are effectively subordinated to
creditors of the Company's subsidiaries. The indenture contains certain
covenants that, among other things, (i) restrict the ability of the Company and
its Restricted Subsidiaries (as defined) to (a) pay dividends and make other
distributions and certain investments, (b) grant liens on their assets, (c)
enter into or permit certain sale and lease-back transactions or (d) engage in
certain mergers, consolidations and sales of assets, and (ii) restrict the
ability of the Company's Restricted Subsidiaries to incur additional
indebtedness or issue shares of preferred stock.
43
<PAGE>
FOUNDATION HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- NOTES PAYABLE, CAPITAL LEASES AND OTHER FINANCING ARRANGEMENTS
(CONTINUED)
The Company has a $300 million unsecured revolving credit agreement with
Citicorp USA, Inc., as Administrative Agent for the lenders thereto (the "Credit
Agreement") which expires December 5, 1999. Principal amounts outstanding under
the Credit Agreement bear interest, at the Company's option, at either
Citibank's base rate or the Eurodollar rate plus a margin depending upon the
Company's public debt rating or level of total debt to total capitalization. Any
interest payments are due quarterly and principal is due at maturity. The
agreement contains customary terms, events of default and covenants (including
financial covenants related to net worth, fixed charge coverage and total debt
to total capitalization) which, among other things, limit the incurring of
additional debt. The Credit Agreement also limits the ability of the Company to
make cash dividends and stock repurchases if the aggregate amount of such
dividends and repurchases exceeds 50% of the cumulative consolidated net income
of the Company beginning with the fiscal year ended June 30, 1994, plus the
after tax effect of up to $125 million of restructuring charges, to the extent
deducted from earnings, plus $25 million after June 30, 1995. As of June 30,
1995, the amount available for cash dividends and stock repurchases under the
Credit Agreement was approximately $108,189,000. Subsequent to June 30, 1995,
the Company drew an additional $40 million under the Credit Agreement.
The Company leases some of its data processing and telecommunications
equipment under capital leases that provide for minimum annual rentals and
purchase options. Equipment under capital leases was $25,127,000 and $36,898,000
at June 30, 1994 and 1995 and the related accumulated depreciation was
$12,308,000, and $15,202,000 at June 30, 1994 and 1995.
Future minimum payments under notes payable, capital leases and other
financing arrangements are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
- -------------------------------------------------------------------------------------------
<S> <C>
1996....................................................................................... $ 24,370
1997....................................................................................... 13,629
1998....................................................................................... 12,663
1999....................................................................................... 31,822
2000....................................................................................... 10,656
Thereafter................................................................................. 154,156
-----------
247,296
-----------
Less -- Amount representing interest....................................................... (82,770)
-----------
$ 164,526
-----------
-----------
</TABLE>
44
<PAGE>
FOUNDATION HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- INCOME TAXES
The provision for income taxes comprised the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
1993 1994 1995
--------- --------- ----------
<S> <C> <C> <C>
Current:
Federal........................................................... $ 49,675 $ 55,352 $ 40,469
State............................................................. 10,530 9,586 7,491
--------- --------- ----------
Total current..................................................... 60,205 64,938 47,960
--------- --------- ----------
Deferred:
Federal........................................................... (3,028) (336) (13,464)
State............................................................. (151) 232 (7,675)
--------- --------- ----------
Total deferred.................................................... (3,179) (104) (21,139)
--------- --------- ----------
Total provision for income taxes.................................... $ 57,026 $ 64,834 $ 26,821
--------- --------- ----------
--------- --------- ----------
</TABLE>
A reconciliation of the statutory federal income tax rate and the effective
tax rate as a percentage of pretax income is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Statutory rate..................................................................... 34% 35% 35%
State income and franchise taxes, net of federal tax benefit....................... 5 4
Amortization of goodwill........................................................... 1 1 5
Nondeductible acquisition costs.................................................... 4 4
Tax exempt interest income......................................................... (5) (4) (9)
Taxes on undistributed income from subsidiaries.................................... 3 3
Other.............................................................................. (1)
-- -- --
Effective tax rate................................................................. 42% 39% 34%
-- -- --
-- -- --
</TABLE>
The federal and state regular statutory rates were applicable for the years
ended June 30, 1993, 1994 and 1995.
45
<PAGE>
FOUNDATION HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- INCOME TAXES (CONTINUED)
The tax effects of the significant temporary differences which comprise the
net deferred tax asset at June 30, 1994 and 1995 were as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
<S> <C> <C>
1994 1995
--------- ---------
Deferred state income taxes...................................................... $ 2,388 $ 1,771
Accrued vacation................................................................. 2,225 3,628
Deferred compensation............................................................ 4,504 5,973
Accrued expenses................................................................. 8,456 9,092
Insurance loss reserves.......................................................... 23,786 23,838
Policyholder dividends........................................................... 11,192 5,536
Restructuring costs.............................................................. 556 32,755
Policy acquisition costs......................................................... (5,005) (6,186)
Depreciation and amortization.................................................... (1,167) (6,709)
Bond premium/discount............................................................ (2,162) (1,759)
Other............................................................................ (239) (2,266)
--------- ---------
Net deferred tax asset........................................................... $ 44,534 $ 65,673
--------- ---------
--------- ---------
</TABLE>
NOTE 9 -- CAPITAL STOCK
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of $1 par value
preferred stock. No preferred stock was outstanding as of June 30, 1994 or 1995.
STOCKHOLDER RIGHTS PLAN
The Company's Stockholder Rights Plan provides for distribution of Rights
(as defined in the Stockholder Rights Plan) to holders of outstanding shares of
common stock. Except as set forth below, each Right, when exercisable, entitles
the stockholder to purchase from the Company one one-thousandth share of a new
series of the Company's preferred stock at a price of $105 per share, subject to
adjustment.
The Rights are not currently exercisable, but would become exercisable if
certain events occurred related to a person or group ("Acquiring Person")
acquiring or attempting to acquire 15% or more of the outstanding shares of
common stock. In the event that the Rights become exercisable, each Right
(except for Rights beneficially owned by the Acquiring Person, which become null
and void) would entitle the holder to purchase, for the exercise price then in
effect, shares of the Company's common stock having a value of twice the
exercise price.
The Rights may be redeemed by the Board of Directors in whole, but not in
part, at a price of $.01 per Right. The Rights have no voting or dividend
privileges and are attached to, and do not trade separately from, the common
stock. A total of 20,000 shares of preferred stock were reserved for future
issuance under this Rights Agreement, which expire on October 10, 2001.
AUTHORIZED COMMON STOCK
In October 1992, the Company's stockholders approved an increase in the
number of authorized shares of common stock from 40,000,000 to 100,000,000.
46
<PAGE>
FOUNDATION HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- CAPITAL STOCK (CONTINUED)
STOCK REPURCHASE PROGRAM
In April 1993, the Board of Directors of the Company approved the
establishment of a stock repurchase program which, as amended, authorizes
acquisition from time to time, of up to 5.7 million shares of its outstanding
common stock in the open market. As of June 30, 1993, 1994, and 1995 the
repurchase of 241,100, 1,445,500 and 1,545,500 shares had been completed
pursuant to this program.
DIVIDENDS PAID
During the year ended June 30, 1994, CareFlorida paid cash dividends of $2
million on its common stock. As discussed in Note 1, the Company's consolidated
financial statements have been restated to reflect the results of CareFlorida in
accordance with the pooling of interest method of accounting.
Other than the CareFlorida dividend described above, the Company has never
paid cash dividends on its common stock. The Company presently intends to retain
its earnings for the development of its business and does not anticipate paying
cash dividends on its common stock in the foreseeable future.
STOCK OPTIONS
Under the Company's Restated and Amended 1990 Stock Option Plan (the "1990
Plan"), options may be either incentive stock options or nonqualified stock
options which expire no later than 10 years from the date of grant. Under the
1990 Plan, the Company has reserved 5,525,000 shares of common stock for the
granting of options. During the years ended June 30, 1993, 1994, and 1995, the
Company granted nonqualified options to purchase 722,265, 1,083,750 and 786,750
shares of the Company's common stock at exercise prices ranging from as 85 to
100% of the fair market value of the stock at the date of grant. Currently,
options are granted at prices determined by the Compensation and Organizational
Committee of the Board of Directors of the Company (the "Compensation
Committee") but may not be less than 100% of the fair market value of the stock
on the date of grant. As of June 30, 1994 and 1995, the total number of options
outstanding under the 1990 Plan were 2,545,958 and 3,154,939.
The Company has reserved 238,000 shares of the Company's common stock from
the granting of options under the 1992 Nonstatutory Stock Option Plan (the "1992
Plan") established in connection with a business acquisition in May 1992. Under
the 1992 Plan, options are granted to employees of the Company or its
subsidiaries at the discretion of a committee of the subsidiary's Board of
Directors. Options are granted at an exercise price equal to the fair market
value of the stock at the date of grant, subject to a vesting schedule of up to
three years, and expire no later than 10 years from the date of grant. Under the
1992 Plan, nonqualified options to purchase 49,300 shares were granted during
the year ended June 30, 1993. As of June 30, 1994 and 1995, the number of
options outstanding under the 1992 Plan were 46,571 and 38,036.
The Company has reserved 600,000 shares of the Company's common stock under
the 1993 Nonstatutory Stock Option Plan (the "1993 Plan") established in October
1993. Under the 1993 Plan, options are granted at the discretion of the
Company's Board of Directors to physician employees of affiliated professional
corporations. Options are granted at an exercise price equal to the fair market
value of the stock at the date of grant. Under the 1993 Plan, nonqualified
options to purchase 145,500 and 381,399 shares were granted during the years
ended June 30, 1994 and 1995. As of June 30, 1994 and 1995, the number of
options outstanding under the 1993 Plan were 145,500 and 499,874. Subsequent to
June 30, 1995, the Company increased the number of shares reserved under the
1993 Plan to 1,600,000.
47
<PAGE>
FOUNDATION HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- CAPITAL STOCK (CONTINUED)
During the year ended June 30, 1992, the Company granted nonqualified stock
options to purchase 172,500 shares of the Company's common stock at exercise
prices determined as 85% of the fair market value of the stock at the date of
grant pursuant to employment agreements entered into in connection with a
business acquisition. Options vested 10% per year beginning July 1, 1992, with
provisions for accelerated vesting in the event certain profitability targets of
the acquired company were exceeded. During the year ended June 30, 1994, the
employment agreements were terminated and all unvested options were canceled.
A summary of the Company's nonqualified and incentive stock options
outstanding is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
----------- ----------------
<S> <C> <C>
Outstanding at June 30, 1992............................................ 1,742,613 $ 18.13
Options exchanged pursuant to acquisition (Note 1)...................... 303,520 6.06
Granted................................................................. 771,565 29.56
Exercised............................................................... (476,352) 8.06
Canceled................................................................ (43,767) 32.50
-----------
Outstanding at June 30, 1993............................................ 2,297,579 22.19
Options exchanged pursuant to acquisition (Note 1)...................... 29,475 9.41
Granted................................................................. 1,229,250 38.17
Exercised............................................................... (572,347) 14.66
Canceled................................................................ (202,482) 24.10
-----------
Outstanding at June 30, 1994............................................ 2,781,475 30.52
Options exchanged pursuant to acquisition (Note 1)...................... 500,290 18.09
Granted................................................................. 1,168,149 31.60
Exercised............................................................... (330,796) 18.05
Canceled................................................................ (229,021) 31.98
-----------
Outstanding at June 30, 1995............................................ 3,890,097 30.22
-----------
-----------
</TABLE>
A summary of options exercisable and shares available for future grant under
all option arrangements is as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Options exercisable.......................................................... 921,798 1,609,941
Shares available for grant................................................... 1,562,603 1,665,609
</TABLE>
The Company receives a tax deduction for the excess of the market value of
the Company's common stock over the exercise price of the option at the date
nonqualified options are exercised by employees of the Company. The related tax
benefit is credited to common stock. The Company makes no charges against
capital with respect to options granted.
NOTE 10 -- EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK PURCHASE PLAN
The Company has reserved 750,000 shares of common stock under an employee
stock purchase plan which became effective October 1, 1990. Full-time employees
of the Company and substantially all of its subsidiaries are eligible to
participate in this Plan if they have been continuously employed by the Company
for not less than six months. Employees electing to participate authorize
payroll
48
<PAGE>
FOUNDATION HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- EMPLOYEE BENEFIT PLANS (CONTINUED)
deductions of up to 10% of their base compensation to purchase shares of common
stock at 85% of the then fair market value of the stock on the date of purchase.
During the years ended June 30, 1993, 1994 and 1995, 19,775, 30,413 and 39,389
shares of common stock were purchased under this plan.
DEFINED CONTRIBUTION PLANS
The Company sponsors several defined contribution retirement plans intended
to be qualified under Sections 401(a) and 401(k) of the Internal Revenue Code.
Participation in the plans is available to substantially all employees.
Generally, employees may contribute up to 10% of their annual compensation to
the plans on a pre-tax basis and up to 10% on an after-tax basis. Under the
plans, the Company makes matching contributions of up to 6% of each
participating employee's base salary. The Company's contributions to the plans
totaled $6,824,000, $5,961,000, and $4,173,000 for the years ended June 30,
1993, 1994, and 1995.
DEFERRED COMPENSATION PLAN
Under the Company's deferred compensation plan certain members of
management, highly compensated employees and non-employee Board members may
defer payment of up to 90% of their compensation. The Company makes matching
contributions subject to a vesting schedule, of up to 10% of an employee
participant's compensation if the participant's base salary is at least
$100,000. The deferred compensation, together with Company matching amounts and
accumulated interest which is accrued but unfunded, is distributable in cash by
lump sum or in monthly, quarterly or annual installments (not exceeding 20
years) upon the date of distribution elected by the participant, termination of
employment or the earlier of the date of distribution elected or termination of
employment. At June 30, 1994 and 1995, the liability under this deferred
compensation plan amounted to $4,769,000 and $9,139,000. The Company's expense
under the plan totaled $1,415,000, $1,664,000 and $1,955,000 for the years ended
June 30, 1993, 1994 and 1995.
During the year ended June 30, 1995, the Company amended the plan by
increasing the interest rate paid to participants to 140% of Moody's corporate
bond rate and by allowing participants to receive 90% of vested funds before
scheduled distributions by irrevocably forfeiting the remaining 10%.
During 1993, TDMC established a deferred compensation plan which called for
payment of deferred compensation to TDMC physicians with five years of service
at termination of employment (the "TDMC Plan"); as part of the merger of TDMC
with the Company the TDMC Plan was frozen in November 1994 and the present value
of each participant's benefits was established. Under the terms of the TDMC
Plan, interest accrues at the Citibank base rate plus 1/4%. The deferred
compensation is distributable in annual installments (not to exceed 10) upon
termination of employment. At June 30, 1994 and 1995, the liability under this
deferred compensation plan amounted to $5,330,000 and $6,389,0000. The Company's
expense under the plan totaled $2,281,000, $2,885,000 and $765,000 for the years
ended June 30, 1993, 1994, and 1995.
DEFINED BENEFIT RETIREMENT PLANS
One of the Company's subsidiaries offers a non-contributory defined benefit
retirement plan ("Retirement Plan") covering substantially all of its employees.
The Retirement Plan is designed to meet the provisions of the Employee
Retirement Income Security Act of 1974. The benefits are primarily based upon
years of service and compensation.
49
<PAGE>
FOUNDATION HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- EMPLOYEE BENEFIT PLANS (CONTINUED)
During the fiscal year ended June 30, 1995, the Company adopted two unfunded
non-qualified defined benefit pension plans, a Supplemental Executive Retirement
Plan and a Directors' Retirement Plan (collectively the "SERP"), which cover key
executives, as selected by the Board of Directors, and nonemployee directors.
Currently there are sixteen participants in the plans. Benefits are based on
years of service and compensation in the last five years of employment, or the
highest three years within the last 10 years of service.
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligations
were 7.5% and 6% respectively, in 1993, 1994, and 1995 for the Retirement Plan,
and 8% and 4%, in 1995 for the SERP. The tables below sets forth the funded
status and amounts recognized in the Company's consolidated financial statements
for the Retirement Plan and the SERP are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
RETIREMENT PLAN
------------------------------- SERP
1993 1994 1995 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation.................................. $ (461) $ (540) $ (651) $ (470)
Nonvested benefit obligation............................... (34) (38) (46) (315)
--------- --------- --------- ---------
Accumulated benefit obligation............................... (496) (578) (697) (785)
Projected benefit obligation................................. (991) (1,184) (1,447) (1,130)
Plan assets at fair value.................................... 659 783 1,380
--------- --------- --------- ---------
Projected benefit obligation in excess of plan assets........ (332) (401) (67) (1,130)
Deferred losses............................................ 174 212 153
Unrecognized net transition obligation..................... 128 118 109 296
--------- --------- --------- ---------
Pension asset (liability).................................... $ (30) $ (71) $ 195 $ (834)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net pension expense was comprised of:
Service cost................................................. $ 112 $ 136 $ 157 $ 788
Interest cost................................................ 66 83 99 25
Net amortization and deferral................................ 16 18 20 21
Return on plan assets........................................ (44) (57) (77)
--------- --------- --------- ---------
Net pension expense.......................................... $ 150 $ 180 $ 199 $ 834
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
During the year ended June 30, 1995, the Company adopted an unfunded
Executive Retiree Medical Plan, which covers key executives, as selected by the
Board of Directors, and their spouses and dependents. The plan provides medical,
dental, and vision benefits during retirement. At June 30, 1995, the projected
benefit obligation was $343,000, the unrecognized net transition obligation was
$194,000, the unrecognized net loss was $63,000, and the pension liability was
$86,000. The components of postretirement benefit expense for the year ended
June 30, 1995 included service cost of $45,000, interest cost of $19,000, and
net amortization and deferral of $22,000 for total benefit expense of $86,000.
The medical cost trend rate assumed was 14%, trending down to 6.5% over a ten
year period. The weighted average discount rate used in determining the
accumulated postretirement benefit obligation at June 30, 1995 was 7.5%.
The Company purchases company-owned life insurance policies to cover the
cost of benefits under the Supplemental Executive Retirement Plan, the
Directors' Retirement Plan, the Executive Retiree Medical Plan, and the deferred
compensation plan. The cash surrender value of these policies at June 30, 1995,
included in other assets, was $13,090,000.
50
<PAGE>
FOUNDATION HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- RELATED PARTY TRANSACTIONS
In December 1992, April 1993 and August 1994, as part of the consolidation
of health care delivery systems resulting from the acquisition of CMC, a senior
officer of the Company acquired two independent practice associations ("IPAs")
which contract with physicians to provide medical services to the Company's
enrollees. During fiscal 1995, an additional IPA was formed by a senior officer
of the Company. During the years ended June 30, 1993, 1994 and 1995, charges for
medical services provided by these IPAs to the Company's enrollees totaled
approximately $5,645,000, $20,562,000 and $40,070,000. In April 1993, the
Company entered into a revolving credit agreement with one of the IPAs, the
terms of which restrict the ability of the IPA and its sole shareholder to pay
dividends, to incur additional indebtedness, to transfer shares, or to otherwise
merge, sell or dispose of assets. The credit agreement bears interest at the
rate of prime plus 2% which is payable quarterly. Principal is due on demand, or
if no demand, no later than April 30, 1997. At June 30, 1994 and 1995,
$3,900,000 and $5,300,000 was outstanding under the credit agreement.
During 1994, the Company contracted with two affiliated professional
corporations (professional medical corporations each owned by a
Company-affiliated physician) to provide health care services to the Company's
enrollees at Company-managed health care centers. During the years ended June
30, 1994 and 1995, charges for medical services provided by these affiliated
professional corporations to the Company's enrollees totaled approximately
$1,700,000 and $85,000,000. The Company provides facilities and support
functions to the health care centers and is reimbursed in the form of a
management fee by the affiliated professional corporations. The management fee
totaled $4,307,000 and $55,271,000 for the years ended June 30, 1994 and 1995.
The Company has revolving credit agreements with the affiliated professional
corporations the terms of which restrict the ability of the professional medical
corporations to pay dividends and bonuses, acquire assets, enter into liens,
incur additional indebtedness or to otherwise merge, sell or dispose of assets.
The credit agreements bear interest at 7.75% and prime plus 1%, respectively.
Principal and interest is due January 22, 1996 subject to automatic one year
extensions of the maturity date unless the Company provides written notice of
intent to terminate the agreements. At June 30, 1994 and 1995, $7,158,000 and
$35,425,000 was outstanding under these agreements.
Management evaluates the collectibility of these loans and, if necessary,
reserves are recorded to reduce carrying amounts to amounts deemed to be
recoverable. No reserves have been deemed necessary as of the dates of these
financial statements.
NOTE 12 -- REGULATORY AND CONTRACTUAL CAPITAL REQUIREMENTS
The Company's HMO subsidiaries are required to maintain a minimum level of
tangible net equity or minimum capital and surplus. The required total tangible
net equity and minimum capital and surplus for all HMOs is approximately
$34,310,000 at June 30, 1995. Under certain government contracts, Federal
Services is required to maintain a current ratio of 1:1 and certain HMO
subsidiaries are required to maintain a current ratio of 1:1 under Medicaid
contracts. The Company's life, accident and health insurance subsidiaries are
required by the Departments of Insurance in the states in which they are
licensed to maintain minimum capital and surplus aggregating $17,250,000. The
Company's workers' compensation insurance subsidiaries are required by the
Departments of Insurance in the states in which they are licensed to maintain
minimum capital and surplus of $5,000,000. The Company and its subsidiaries are
in compliance with the applicable minimum regulatory and capital requirements
described above.
As a result of the above requirements and certain other regulatory
requirements, certain subsidiaries are subject to restrictions on their ability
to make dividend payments, loans or other transfers of
51
<PAGE>
FOUNDATION HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- REGULATORY AND CONTRACTUAL CAPITAL REQUIREMENTS (CONTINUED)
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.
As of June 30, 1995, restricted net assets of these subsidiaries totaled
approximately $59,785,000.
NOTE 13 -- COMMITMENTS AND CONTINGENCIES
During the year ended June 30, 1995, the Company entered into a $60 million
tax retention operating lease with NationsBank of Texas, N.A., as Administrative
Agent for the Lenders who are parties thereto and First Security Bank of Utah,
N.A., as Owner Trustee (the "TROL" agreement) for the construction of health
care centers and corporate facilities.
Under the TROL agreement, rental payments commence upon completion of
construction, with a guarantee of 87% to the lessor of the residual value of
properties leased at the end of the lease term. After the initial five year
noncancelable lease term, the lease may be extended by agreement of the parties
or the Company must purchase or arrange for sale of the leased properties. The
Company has committed to a guaranteed residual value of $4.7 million at June 30,
1995 under this agreement.
The future minimum rental payments required under operating leases for all
of the Company's office space and equipment and for properties under
construction that have initial or remaining noncancelable lease terms in excess
of one year are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
- -----------------------------------------------------------------------------------
<S> <C>
1996............................................................................... $ 19,750
1997............................................................................... 15,739
1998............................................................................... 13,438
1999............................................................................... 9,935
2000............................................................................... 5,886
Thereafter......................................................................... 7,289
---------
$ 72,037
---------
---------
</TABLE>
Lease expense for office space and equipment was $15,390,000, $21,429,000
and $25,425,000 for the years ended June 30, 1993, 1994 and 1995.
The Company maintains general liability and managed care professional
liability and directors and officers insurance and other insurance coverage in
amounts the Company believes to be adequate. The Company requires contracting
health care providers to maintain malpractice insurance coverage in amounts
customary in the industry.
In the ordinary course of its business the Company is a party to claims and
legal actions by enrollees, providers and others. The Company also undergoes
governmental audits and investigations with regard to its government contracts
and with respect to operations of its HMO, insurance, and third party
administrator subsidiaries. After consulting with legal counsel, the Company is
of the opinion that any liability that may ultimately be incurred as a result of
these claims, legal actions, audits or investigations will not have a material
adverse effect on the consolidated financial position or results of operations
of the Company.
52
<PAGE>
FOUNDATION HEALTH CORPORATION
SUPPLEMENTAL SCHEDULE
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1994 1995
----------- -------------
<S> <C> <C>
Cash and cash equivalents............................................................. $ 31,857 $ 1,954
Investments:
Available for sale investments......................................................
Held to maturity investments........................................................
Short-term investments.............................................................. 13,002
Fixed maturity investments.......................................................... 23,932
Advances to subsidiaries.............................................................. 47,008 10,336
Property and equipment, net........................................................... 2,428 8,510
Investment in subsidiaries............................................................ 388,560 822,142
Organization and debt issuance costs, net............................................. 2,593 14,047
Other assets.......................................................................... 64,503 167,311
----------- -------------
$ 573,883 $ 1,024,300
----------- -------------
----------- -------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Notes payable and capital leases...................................................... $ 127,579 $ 177,674
Accounts payable and other liabilities................................................ 23,861 89,727
----------- -------------
151,440 267,401
----------- -------------
Stockholders' equity:
Common stock........................................................................ 264,976 518,671
Retained earnings................................................................... 194,800 244,249
Unrealized holding losses........................................................... (2,974)
Common stock held in treasury, at cost.............................................. (37,333) (3,047)
----------- -------------
422,443 756,899
----------- -------------
$ 573,883 $ 1,024,300
----------- -------------
----------- -------------
</TABLE>
S-1
<PAGE>
FOUNDATION HEALTH CORPORATION
SUPPLEMENTAL SCHEDULE
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Government contracts..................................................... $ 846 $ 978 $ 1,432
Interest and other income................................................ 4,736 7,095 8,124
Intercompany charges..................................................... 70,328 82,516 31,906
Equity in subsidiary income.............................................. 49,321 64,872 88,552
----------- ----------- -----------
125,231 155,461 130,014
----------- ----------- -----------
EXPENSES:
Selling, general and administrative...................................... 25,104 31,852 19,438
Amortization and depreciation............................................ 1,725 303 754
Interest expense......................................................... 1,286 10,265 11,795
Provision for restructuring.............................................. 7,247 84,436
----------- ----------- -----------
35,362 42,420 116,423
----------- ----------- -----------
Income before income taxes............................................... 89,869 113,041 13,591
Provision for income taxes............................................... 16,532 19,400 (35,858)
----------- ----------- -----------
Net income............................................................... $ 73,337 $ 93,641 $ 49,449
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
S-2
<PAGE>
FOUNDATION HEALTH CORPORATION
SUPPLEMENTAL SCHEDULE
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------
1993 1994 1995
------------ ---------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................. $ 73,337 $ 93,641 $ 49,449
Adjustments to reconcile net income to cash provided by operating
activities:
Amortization and depreciation...................................... 1,772 305 830
Equity in subsidiary income........................................ (49,321) (64,986) (88,552)
Change in assets and liabilities, net of effects from acquisition
of businesses:
Other assets..................................................... (5,814) (3,560) (44,736)
Other liabilities................................................ 5,252 6,466 49,604
Deferred income taxes, net....................................... 2,422 (2,457) (11,163)
Investment in and advances to subsidiaries....................... (8,865) (50,301) 36,672
------------ ---------- ------------
Net cash from (used for) operating activities............................ 18,783 (20,892) (7,896)
------------ ---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment.................................. (603) (673) (6,399)
Decrease (increase) in short-term investments.......................... (149,900) 112,966
Purchases of available for sale investments............................ (256,450)
Sales and maturities of available for sale investments................. 292,344
Purchases of held to maturity investments.............................. (12,949)
Maturities of held to maturity investments............................. 10,967
Notes receivable from affiliates....................................... (11,834) (35,708) (43,352)
Acquisition of businesses.............................................. (4,117) (73,242) (15,727)
------------ ---------- ------------
Net cash from (used for) investing activities (166,454) 3,343 (31,566)
------------ ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable and capital leases................. (9,408) (282) (382)
Proceeds from issuance of notes payable and capital leases............. 124,490 30,542
Proceeds from issuance of common stock -- net.......................... 572 812 6,448
Proceeds from exercise of stock options................................ 4,328 8,403 5,920
Tax benefits related to stock options.................................. 1,669 5,410 4,645
Cash dividends received................................................ 15,800 27,400 54,997
Purchase of note receivable............................................ (775)
Purchase of treasury stock, net........................................ (6,798) (27,363) (3,047)
Transfer of cash to subsidiary......................................... (2,270) (52,751) (89,564)
------------ ---------- ------------
Net cash from (used for) financing activities............................ 127,608 (38,371) 9,559
------------ ---------- ------------
Net decrease in cash and cash equivalents................................ (20,063) (55,920) (29,903)
Cash and cash equivalents, beginning of year............................. 107,840 87,777 31,857
------------ ---------- ------------
Cash and cash equivalents, end of year................................... $ 87,777 $ 31,857 $ 1,954
------------ ---------- ------------
------------ ---------- ------------
</TABLE>
S-3
<PAGE>
FOUNDATION HEALTH CORPORATION
SUPPLEMENTAL INFORMATION
CONCERNING PROPERTY -- CASUALTY INSURANCE
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS
RESERVES
FOR UNPAID
DEFERRED CLAIMS AND DISCOUNT IF
POLICY CLAIMS ANY, GROSS NET
ACQUISITION ADJUSTMENT DEDUCTED IN UNEARNED EARNED INVESTMENT
AFFILIATION WITH COSTS EXPENSES COLUMN C PREMIUMS PREMIUMS INCOME
REGISTRANT COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
- -------------------------------------------------- ----------- ---------- ----------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Consolidated property and casualty entities....... $18,851 $ 414,330 -- $11,305 $358,051 $21,437
<CAPTION>
CLAIMS & CLAIM
ADJUSTMENT
EXPENSES INCURRED AMORTIZATION
RELATED TO OF DEFERRED PAID CLAIMS
-------------------- POLICY AND CLAIM DIRECT
(1) (2) ACQUISITION ADJUSTMENT PREMIUMS
AFFILIATION WITH CURRENT PRIOR YEAR COSTS COLUMN EXPENSES WRITTEN
REGISTRANT COLUMN A YEAR COLUMN H I COLUMN J COLUMN K
- -------------------------------------------------- -------- ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
Consolidated property and casualty entities....... $232,643 $(7,614) $24,947 $152,081 $370,408
</TABLE>
S-4
<PAGE>
FOUNDATION HEALTH CORPORATION
SECTION 403.04b
RECONCILIATION OF BEGINNING AND ENDING LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
AND EXHIBIT OF REDUNDANCIES (DEFICIENCIES)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
---------------------------------------------------------------------------------------------- ENDED JUNE
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 30, 1995
-------- ------- ------- ------- ------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid
losses and loss
adjustment expenses.... $ 33,438 $43,944 $53,170 $55,089 $76,296 $158,268 $206,993 $219,464 $268,191 $322,394 $332,663
Paid (cumulative) as of:
One year later........ 11,643 13,607 14,186 11,649 20,541 59,110 103,361 106,693 115,189 79,923
Two years later....... 19,268 23,110 21,998 20,780 36,151 106,334 167,932 191,397 136,582
Three years later..... 24,503 28,268 27,849 28,389 44,665 130,826 221,087 196,998
Four years later...... 27,470 32,229 33,527 31,492 50,240 146,186 217,888
Five years later...... 29,955 37,007 35,630 34,015 53,896 149,802
Six years later....... 32,827 38,526 37,448 35,975 55,178
Seven years later..... 33,752 40,088 39,121 36,633
Eight years later..... 34,870 41,441 39,696
Nine years later...... 36,136 41,933
Ten years later....... 36,540
Liability re-estimated
as of:
One year later........ 41,947 51,633 53,321 51,147 75,988 160,141 218,747 251,012 262,032 308,133
Two years later....... 44,821 50,702 52,382 51,991 65,376 162,040 242,231 257,134 254,661
Three years later..... 41,663 50,506 54,349 43,651 61,098 172,981 242,533 253,668
Four years later...... 43,838 55,059 47,241 41,513 66,135 172,269 240,948
Five years later...... 43,745 48,512 46,116 44,701 66,174 171,658
Six years later....... 43,332 47,898 47,011 45,364 65,900
Seven years later..... 42,249 48,650 47,928 45,122
Eight years later..... 42,528 49,625 47,743
Nine years later...... 43,677 49,686
Ten years later....... 43,740
Redundancy
(deficiency)........... $(10,302) $(5,742) $ 5,427 $ 9,967 $10,396 $(13,390) $(33,955) $(34,204) $ 13,530 $ 14,261
Net reserve -- end of
period................. $322,394 $332,663
Reinsurance recoverable
on unpaid losses and
loss adjustment
expense................ 90,366 81,667
-------- ----------
Gross reserve -- end of
period................. 412,760 414,330
Net re-estimated reserve
-- end of period....... 308,133
Re-estimated reinsurance
recoverable............ 93,339
--------
Gross re-estimated
reserve -- end of
period................. 401,472
--------
Gross cumulative
redendancy............. $ 11,288
--------
--------
</TABLE>
S-5
<PAGE>
FOUNDATION HEALTH CORPORATION
ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION SEQUENTIAL PAGE
- ----------- ----------------------------------------------------------------------------------------- ---------------
<C> <S> <C>
3.1(1) Restated Certificate of Incorporation of Foundation Health Corporation.
3.2(3) Amended and Restated Bylaws of Foundation Health Corporation.
4.1(6) Specimen of Foundation Health Corporation Common Stock certificate with Rights Legend.
4.2(6) Form of Rights Certificate (incorporated by reference to Foundation Health Corporation's
Form 8-A dated September 27, 1991).
4.3(9) Form of Indenture.
4.4(9) Form of Senior Notes.
4.5 1993 Nonstatutory Stock Option Plan of Foundation Health Corporation, as amended.
10.3(16) Executive Incentive Plan of Foundation Health Corporation.
10.20(2) Lease Agreement between HAS-First Associates and Foundation Health Corporation dated
August 1, 1988 and form of amendment thereto.
10.38(2) Stock Purchase and Asset Sale Agreement dated November 1, 1989 between Foundation Health
Corporation and Foundation Health Federal Services, Inc. and amendment thereto.
10.39(2) Form of Indemnification Agreement.
10.53(1) Employee Stock Purchase Plan.
10.61(3) United States Government DoD Contract No. MDA 903-91-C-0155 between DoD and Foundation
Health Federal Services, Inc. dated June 7, 1991.
10.62(4) Asset Purchase Agreement dated July 3, 1991 between Foundation Health Preferred
Administrators and Preferred Administrators, Inc.
10.63(4) Asset Purchase Agreement dated December 1, 1991 among Foundation Health Pharmaceutical
Services, Inc., Apollo Billing Service, and as to certain parts thereof, Anthony Ponzo,
Patricia Ponzo and Robert Rhoads.
10.64(3) Agreement and Plan of Reorganization among Foundation Health Corporation, FH Acquisition
Corporation and National Health Care Systems, Inc.
10.65(4) Stock Purchase Agreement dated February 14, 1991 between the Company and Western
Universal Corporation.
10.67(5) Stock Purchase Agreement between Foundation Health Corporation, American Travelers
Corporation and American Travelers Life Insurance Company dated March 31, 1992.
10.68(5) Stock and Asset Purchase Agreement among Foundation Health Corporation, Thomas R. and
Linda S. Leonard and Bayport Leasing Company dated as of May 18, 1992.
10.69(5) Stock Purchase Agreement among Foundation Health Corporation, Deborah S. Greenfield and
James Thompson dated as of May 15, 1992.
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION SEQUENTIAL PAGE
- ----------- ----------------------------------------------------------------------------------------- ---------------
<C> <S> <C>
10.70(6) Stock Purchase Agreement among Foundation Health Corporation and the holders of common
stock of Allstate Optical Services, Inc. dated as of June 8, 1992.
10.71(12) Agreement and Plan of Reorganization among Foundation Health Corporation, FHC Acquisition
Corporation, Occupational Health Services, Inc. and the OHS shareholders dated July 31,
1992.
10.72(6) Agreement and Plan of Reorganization dated as of July 14, 1992, by and among Foundation
Health Corporation, Century Medicorp, Inc. and FH Acquisition Corporation.
10.73(7) Century MediCorp, Inc. 1983 Incentive Stock Option Plan.
10.74(7) Century MediCorp, Inc. 1988 Nonstatutory Stock Option Plan.
10.75(7) Century MediCorp, Inc. 1989 Nonstatutory Stock Option Plan.
10.76(7) Century MediCorp, Inc. 1991 Nonstatutory Stock Option Plan.
10.79(9) Agreement and Plan of Reorganization among Foundation Health Corporation, FHC Acquisition
Corporation and Business Insurance Corporation dated April 10, 1993.
10.80(10) 1989 Stock Plan of Business Insurance Corporation.
10.81(11) 1992 Nonstatutory Stock Option Plan of Foundation Health Corporation.
10.82(13) MDA 903-91-C-0155 Modification for Implementation of BRAC expansion sites in Louisiana
and Texas.
10.83(14) Employment Agreement between Foundation Health Corporation and Daniel D. Crowley dated
April 30, 1994.
10.85(14) Employment Agreement between Foundation Health Corporation and Jeffrey L. Elder dated
April 22, 1994.
10.86(14) Employment Agreement between Foundation Health Corporation and Steven D. Tough dated
April 22, 1994.
10.87(14) Employment Agreement between Foundation Health Corporation and Kirk A. Benson dated April
22, 1994.
10.88(14) Employment Agreement between Foundation Health Corporation and Allen J. Marabito dated
April 22, 1994.
10.89(14) Agreement and Plan of Reorganization dated as of May 24, 1994 among Foundation Health
Corporation, FHC Acquisition Subsidiary, Southern Colorado Health Plan, Inc., the
stockholders of Southern Colorado Health Plan, Inc. and Southern Colorado Health
Management, Inc.
10.90(14) Agreement and Plan of Reorganization dated as of May 2, 1994 among Foundation Health
Corporation, The Noetics Group, Reviewco and the other parties signatory thereto.
10.91(15) Agreement and Plan of Reorganization dated as of June 27, 1994 by and among Foundation
Health Corporation, CareFlorida Health Systems, Inc. and the other parties signatory
thereto.
10.92(16) Agreement and Plan of Merger dated as of July 28, 1994 between Foundation Health
Corporation and Intergroup Healthcare Corporation.
10.93(16) Agreement and Plan of Merger dated as of July 28, 1994 between Foundation Health
Corporation and Thomas-Davis Medical Centers, P.C.
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION SEQUENTIAL PAGE
- ----------- ----------------------------------------------------------------------------------------- ---------------
<C> <S> <C>
10.96(13) Foundation Health Corporation Directors' Retirement Plan.
10.97(17) $300 Million Revolving Credit Agreement dated as of December 5, 1994 among Foundation
Health Corporation, as Borrower, Citicorp USA, Inc., as Administrative Agent, Wells
Fargo Bank, N.A. and NationsBank of Texas, N.A., as Co-Agents and Citicorp Securities,
Inc., as Arranger, and the Other Banks and Financial Institutions Party thereto.
10.98 Participation Agreement dated as of May 25, 1995 among Foundation Health Medical
Services, as Construction Agent and Lessee, Foundation Health Corporation, as Guarantor,
First Security Bank of Utah, N.A., as Owner Trustee, Sumitomo Bank Leasing and Finance,
Inc., The Bank of Nova Scotia and NationsBank of Texas, N.A., as Holders and NationsBank
of Texas, N.A., as Administrative Agent for the Lenders; and Guaranty Agreement dated as
of May 25, 1995 by Foundation Health Corporation for the benefit of First Security Bank
of Utah, N.A.
10.99 Foundation Health Corporation Deferred Compensation Plan, as amended and restated.
10.100 Foundation Health Corporation Supplemental Executive Retirement Plan, as amended and
restated.
10.101 Foundation Health Corporation Executive Retiree Medical Plan, as amended and restated.
10.102 Foundation Health Corporation 1990 Stock Option Plan, as amended and restated effective
April 20, 1994.
10.103 Foundation Health Corporation Profit Sharing and 401(k) Plan (as amended and restated
effective January 1, 1994).
11.0 Computation of Earnings per Share.
12.0 Computation of Ratios.
13.1 Report of Ernst & Young LLP.
13.2 Report of Stevenson, Jones & Holmaas, P.C.
13.3 Report of Coopers & Lybrand L.L.P.
21.0 Subsidiaries of Foundation Health Corporation.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Stevenson, Jones & Holmaas, P.C.
23.4 Consent of Coopers & Lybrand L.L.P.
24.1 Power of Attorney (included on page i).
<FN>
- ------------------------
(1) Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-1 (File No. 33-38867).
(2) Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-1 (File No. 33-34963).
(3) Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-4 (File No. 33-42690).
</TABLE>
iii
<PAGE>
<TABLE>
<C> <S>
(4) Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-1 (File No.33-45513).
(5) Incorporated by reference to the Exhibits to Registrant's Form 10-Q for
the quarter ended March 31, 1992 filed with the Commission on May 14,
1992.
(6) Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-4 (File No. 33-51648).
(7) Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-8 (File No. 33-53468).
(8) Incorporated by reference to the Exhibits to Registrant's Form 8-K filed
on October 30, 1992.
(9) Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-3 (File No. 33-61684).
(10) Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-8 (File No. 33-67062).
(11) Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-8 (File No. 33-48561).
(12) Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-4 (File No. 33-51992).
(13) Incorporated by reference to the Exhibits to Registrant's Form 10-K for
the year ended June 30, 1994 filed with the Commission on September 24,
1994.
(14) Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form S-4 (File No. 33-80432).
(15) Incorporated by reference to the Exhibits to Registrant's current report
on Form 8-K filed with the Commission on June 28, 1994.
(16) Incorporated by reference to the Exhibits to Registrant's current report
on Form 8-K filed with the Commission on August 9, 1994.
(17) Incorporated by reference to the Exhibits to Registrant's quarterly report
on Form 10-Q for the quarter ended December 31, 1994 filed with the
Commission on February 14, 1995.
</TABLE>
iv
<PAGE>
AMENDED AND RESTATED
1993 NONSTATUTORY STOCK OPTION PLAN OF
FOUNDATION HEALTH CORPORATION
(As amended and restated effective September 7, 1995)
SECTION I. ESTABLISHMENT AND PURPOSE
The Plan is being established to offer selected employees of the
Company an opportunity to acquire a proprietary interest in the success of FHC,
or to increase such interest, by exercising Options to purchase Shares of Stock.
Options granted under the Plan are Nonstatutory Options.
SECTION II. DEFINITIONS
A. "BOARD OF DIRECTORS" shall mean the Board of Directors of FHC, as
constituted from time to time.
B. "CODE" shall mean the Internal Revenue Code of 1986, as amended.
C. "COMMITTEE" shall mean a committee of the Board of Directors, as
described in Section III (A).
D. "COMPANY" shall mean Foundation Health Medical Group, Inc., a
California professional medical corporation, and Thomas-Davis Medical Centers,
P.C., an Arizona professional medical corporation, and such affiliated
professional medical corporations as may be established from time to time by
FHC.
E. "EMPLOYEE" shall mean any individual who is an employee of the
Company or any professional medical corporation of which the Company owns at
least 25%, and who is considered a full-time equivalent employee for purposes of
employee benefits provided by the Company or such professional medical
corporation of which the Company owns at least 25%.
F. "EXERCISE PRICE" shall mean the amount for which one Share may be
purchased upon exercise of an Option, as specified in the applicable Stock
Option Agreement.
G. "FAIR MARKET VALUE" shall mean the market price of Stock,
determined by the Committee as follows:
(i) If the Stock was traded over-the-counter on the date in question
but was not classified as a national market issue, then the Fair Market Value
shall be equal to the mean between the last reported representative bid and
asked prices quoted by the NASDAQ system for such date, or if such date is not a
trading day, on the last trading day immediately preceding such date;
(ii) If the Stock was traded over-the-counter on the date in question
and was classified as a national market issue, then the Fair Market Value shall
be equal to the last-transaction price quoted by the NASDAQ system for such
date, or if such date is not a trading day, on the last trading day immediately
preceding such date;
(iii) If the Stock was traded on a stock exchange on the date in
question, then the Fair Market Value shall be equal to the closing price
reported by the applicable composite-transactions report for such date, or if
such date is not a trading day, on the last trading day immediately preceding
such date; and
(iv) If none of the foregoing provisions is applicable, then the Fair
Market Value shall be determined by the Committee in good faith on such basis as
it deems appropriate.
In all cases, the determination of Fair Market Value by the Committee shall
be conclusive and binding on all persons.
H. "FHC" shall mean Foundation Health Corporation, a Delaware
corporation.
I. "NONSTATUTORY OPTION" shall mean a stock option not described in
section 422(b) or 423 (b) of the Code.
J. "OPTION" shall mean a Nonstatutory Option granted under the Plan
and entitling the
1
<PAGE>
holder to purchase Shares.
K. "OPTIONEE" shall mean an individual who holds an Option.
L. "PLAN" shall mean this 1993 Nonstatutory Stock Option Plan of
Foundation Health Corporation, as amended from time to time.
M. "SERVICE" shall mean service as an Employee.
N. "SHARE" shall mean one share of Stock, as adjusted in accordance
with Section VIII (if applicable).
O. "STOCK" shall mean the Common Stock, $.01 par value per share, of
FHC.
P. "STOCK OPTION AGREEMENT" shall mean the agreement between FHC and
an Optionee which contains the terms, conditions and restrictions pertaining to
his or her Option.
Q. "SUBSIDIARY" shall mean any corporation, if the Company and/or
one or more other Subsidiaries own not less than 50 percent of the total
combined voting power of all classes of outstanding stock of such corporation.
A corporation that attains the status of a Subsidiary on a date after the
adoption of the Plan shall be considered a Subsidiary commencing as of such
date.
R. "TOTAL AND PERMANENT DISABILITY" shall mean that the Optionee is
unable to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted, or can be expected to last, for a continuous period
of not less than 12 months.
SECTION III. ADMINISTRATION.
A. COMMITTEE MEMBERSHIP. The Plan shall be administered by the
Committee, which shall consist of two or more members of the Board of Directors.
The members of the Committee shall be appointed by the Board of Directors. If
no Committee has been appointed, the entire Board of Directors shall constitute
the Committee.
B. COMMITTEE PROCEDURES. The Board of Directors shall designate one
of the members of the Committee as chairperson. The Committee may hold meetings
at such times and places as it shall determine. The acts of a majority of the
Committee members present at meetings at which a quorum exists, or acts reduced
to or approved in writing by all Committee members, shall be valid acts of the
Committee.
C. COMMITTEE RESPONSIBILITIES. Subject to the provisions of the
Plan, the Committee shall have full authority and discretion to take the
following actions:
1. To interpret the Plan and to apply its provisions;
2. To adopt, amend or rescind rules, procedures and forms relating
to the Plan;
3. To authorize any person to execute, on behalf of FHC, any
instrument required to carry out the purposes of the Plan;
4. To determine when Options are to be granted under the Plan;
5. To select the Optionees;
6. To determine the number of Shares to be made subject to each
Option;
7. To prescribe the terms and conditions of each Option, including
(without limitation) the Exercise Price, and to specify the
provisions of the Stock Option Agreement relating to such Option;
8. To amend any outstanding Stock Option Agreement, subject to
applicable legal restrictions and to the consent of the Optionee
who entered into such agreement;
9. To prescribe the consideration for the grant of each Option under
the Plan and to determine the sufficiency of such consideration;
and
10. To take any other actions deemed necessary or advisable for the
administration of the Plan.
All decisions, interpretations and other actions of the Committee shall be final
and binding on all Optionees and all persons deriving their rights from an
Optionee. No member of the Committee shall be liable for any action that he or
she has taken or has failed to take in good faith with
2
<PAGE>
respect to the Plan or any Option.
SECTION IV. ELIGIBILITY.
EMPLOYEES. Employees shall be eligible for designation as
Optionees by the Committee.
SECTION V. STOCK SUBJECT TO PLAN.
A. BASIC LIMITATION. Shares offered under the Plan shall be
authorized but unissued Shares or treasury Shares. The aggregate number of
Shares which may be issued under the Plan upon exercise of Options shall not
exceed 1,600,000 Shares, subject to adjustment pursuant to Section VIII. The
number of Shares which are subject to Options outstanding at any time under the
Plan shall not exceed the number of Shares which then remain available for
issuance under the Plan. FHC, during the term of the Plan, shall at all times
reserve and keep available sufficient Shares to satisfy the requirements of the
Plan.
B. ADDITIONAL SHARES. In the event that any outstanding Option
for any reason expires or is canceled or otherwise terminated, the Shares
allocable to the unexercised portion of such Option shall again be available for
the purposes of the Plan. In the event that Shares issued under the Plan are
acquired by FHC pursuant to a forfeiture provision, a right of repurchase or a
right of first refusal, such Shares shall again be available for the purposes of
the Plan.
SECTION VI. TERMS AND CONDITIONS OF OPTIONS.
A. TERMS.
1. STOCK OPTION AGREEMENT. Each grant of an Option under the
Plan shall be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such Option shall be subject to all applicable terms and conditions of
the Plan and may be subject to any other terms and conditions which the
Committee deems appropriate for inclusion in a Stock Option Agreement. The
provisions of the various Stock Option Agreements entered into under the Plan
need not be identical.
2. NUMBER OF SHARES. Each Stock Option Agreement shall specify
the number of Shares that are subject to the Option and shall provide for the
adjustment of such number in accordance with Section VIII.
3. EXERCISE PRICE. Each Stock Option Agreement shall specify
the Exercise Price which shall be 100 percent of the Fair Market Value of a
Share on the date of grant. The Exercise Price shall be payable in a form
described in Section VII.
4. EXERCISABILITY AND TERM. Each Stock Option Agreement shall
specify the date when all or any installment of the Option is to become
exercisable. The vesting of any Option shall be determined by the Committee at
its sole discretion. A Stock Option Agreement may provide for accelerated
exercisability in the event of the Optionee's death, Total and Permanent
Disability or retirement, a change in control with respect to FHC or other
events. The Stock Option Agreement shall also specify the term of the Option.
The term shall not exceed 10 years from the date of grant. Subject to the
preceding sentence, the Committee at its sole discretion shall determine when an
Option is to expire.
B. WITHHOLDING TAXES. As a condition to the exercise of an
Option, the Optionee shall make such arrangements as the Committee may require
for the satisfaction of any federal, state, local or foreign withholding tax
obligations that may arise in connection with such exercise.
C. NONTRANSFERABILITY. No Option shall be transferable by the
Optionee other than by will, by a beneficiary designation executed by the
Optionee and delivered to FHC or by the laws of descent and distribution. An
Option may be exercised during the lifetime of the Optionee only by him or her
or by his or her guardian or legal representative. No Option or interest
therein may be transferred, assigned, pledged or hypothecated by the Optionee
during his
3
<PAGE>
or her lifetime, whether by operation of law or otherwise, or be made subject to
execution, attachment or similar process.
D. TERMINATION OF SERVICE (EXCEPT BY DEATH). If an Optionee's
Service terminates for any reason other than his or her death, then his or her
Option(s) shall expire on the earliest of the following occasions:
1. The expiration date determined pursuant to Subsection A(4) above;
2. The date 90 days after the termination of his or her Service for
any reason other than Total and Permanent Disability; or
3. The date 12 months after the termination of his or her Service by
reason of Total and Permanent Disability.
The Optionee may exercise all or part of his or her Option(s) at any time before
the expiration of such Option(s) under the preceding sentence, but only to the
extent that such Option(s) had become exercisable before his or her Service
terminated or became exercisable as a result of the termination. The balance of
such Option(s) shall lapse when the Optionee's Service terminates. In the event
that the Optionee dies after the termination of his or her Service but before
the expiration of his or her Option(s), all or part of such Option(s) may be
exercised (prior to expiration) by the executors or administrators of the
Optionee's estate or by any person who has acquired such Option(s) directly from
him or her by bequest, beneficiary designation or inheritance, but only to the
extent that such Option(s) had become exercisable before his or her Service
terminated or became exercisable as a result of the termination.
E. LEAVES OF ABSENCE. For purposes of Subsection D above,
Service shall be deemed to continue while the Optionee is on a military leave,
sick leave or other bona fide leave of absence (as determined by the Committee)
which has been approved by the Company in writing.
F. DEATH OF OPTIONEE. If an Optionee dies while he or she is
in Service, then his or her Option(s) shall expire on the earlier of the
following dates:
1. The expiration date determined pursuant to Subsection A(4)
above; or
2. The date 12 months after his or her death.
All or part of the Optionee's Option(s) may be exercised at any time before the
expiration of such Option(s) under the preceding sentence by the executors or
administrators of his or her estate or by any person who has acquired such
Option(s) directly from him or her by bequest, beneficiary designation or
inheritance, but only to the extent that such Option(s) had become exercisable
before his or her death or became exercisable as a result of his or her death.
The balance of such Option(s) shall lapse when the Optionee dies.
G. NO RIGHTS AS A STOCKHOLDER. An Optionee, or a transferee of
an Optionee, shall have no rights as a stockholder of FHC with respect to any
Shares covered by his or her Option until the date of the issuance of a stock
certificate for such Shares. No adjustments shall be made, except as provided
in Section VIII.
H. MODIFICATION, EXTENSION AND ASSUMPTION OF OPTIONS. Within
the limitations of the Plan, the Committee may modify, extend or arrange for the
assumption of outstanding Options or may accept the cancellation of outstanding
Options (whether granted by FHC or another issuer) in return for the grant of
new Options for the same or a different number of Shares and at the same or a
different price. The foregoing notwithstanding, no modification of an Option
shall, without the consent of the Optionee, impair his or her rights or increase
his or her obligations under such Option.
I. RESTRICTIONS ON TRANSFER OF SHARES. Any Shares issued upon
exercise of an Option shall be subject to such special forfeiture conditions,
rights of repurchase, rights of first refusal and other transfer restrictions as
the Committee may determine. Such restrictions shall be set forth in the
applicable Stock Option Agreement and shall apply in addition to any general
restrictions that may apply to all holders of Shares.
SECTION VII. PAYMENT FOR SHARES.
A. GENERAL RULE. The entire Exercise Price of Shares issued
under the Plan shall
4
<PAGE>
be payable in lawful money of the United States of America at the time when such
Shares are purchased, except that FHC (at its sole discretion) may accept
payment in one or more of the forms described below:
1. SURRENDER OF STOCK. To the extent that this Subsection (1)
is applicable, payment may be made all or in part with Shares which have already
been owned by the Optionee or his or her representative for more than 12 months
and which are surrendered to FHC in good form for transfer. Such Shares shall
be valued at their Fair Market Value on the date when the new Shares are
purchased under the Plan.
2. EXERCISE/SALE. To the extent that this Subsection (2) is
applicable, payment may be made by the delivery (on a form prescribed by FHC) of
an irrevocable direction to a securities broker approved by FHC to sell Shares
and to deliver all or part of the sales proceeds to FHC in payment of all or
part of the Exercise Price and any withholding taxes.
3. EXERCISE/PLEDGE. To the extent that this Subsection (3) is
applicable, payment may be made by the delivery (on a form prescribed by FHC) of
an irrevocable direction to pledge Shares to a securities broker or lender
approved by FHC, as security for a loan and to deliver all or part of the loan
proceeds to FHC in payment of all or part of the Exercise Price and any
withholding taxes.
4. PROMISSORY NOTE. To the extent that this Subsection (4) is
applicable, a portion of the Exercise Price of Shares issued under the Plan may
be payable by a full-recourse promissory note, provided that (i) the par value
of such Shares must be paid in lawful money of the United States of America at
the time when such Shares are purchased, (ii) the Shares are security for
payment of the principal amount of the promissory note and interest thereon, and
(iii) the interest rate payable under the terms of the promissory note shall be
no less than the minimum rate (if any) required to avoid the imputation of
additional interest under the Code. Subject to the foregoing, the Committee (in
its sole discretion) shall specify the term, interest rate, amortization
requirements (if any), and other provisions of such note.
SECTION VIII. ADJUSTMENT OF SHARES.
A. GENERAL. In the event of a subdivision of the outstanding
Stock, a declaration of a dividend payable in Shares, a declaration of a
dividend payable in a form other than Shares in an amount that has a material
effect on the value of Shares, a combination or consolidation of the outstanding
Stock (by reclassification or otherwise) into a lesser number of Shares, a
recapitalization or a similar occurrence, the Committee shall make appropriate
adjustments in one or more of (i) the number of Shares available for future
grants under Section V, (ii) the number of Shares covered by each outstanding
Option, or (iii) the Exercise Price under each outstanding Option.
B. MERGER; CONSOLIDATION. In the event that FHC is a party to
a merger or consolidation, outstanding Options shall be subject to the agreement
of merger or consolidation. Such agreement may provide, without limitation, (i)
for the assumption of outstanding Options by the surviving corporation or its
parent, (ii) for their continuation by FHC, if FHC is a surviving corporation,
(iii) for payment of a cash settlement equal to the difference between the
amount to be paid for one Share under such agreement and the Exercise Price, or
(iv) for the acceleration of their exercisability followed by the cancellation
of Options not exercised. In the case of Options that have been outstanding for
less than 12 months, a cancellation need not be preceded by an acceleration.
C. RESERVATION OF RIGHTS. Except as provided in this Section
VIII, an Optionee shall have no rights by reason of (i) any subdivision or
consolidation of shares of Stock of any class, (ii) the payment of any dividend,
or (iii) any other increase or decrease in the number of shares of stock of any
class. Any issue by FHC of shares of stock of any class, or securities
convertible into shares of stock of any class, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number or
Exercise Price of Shares subject to an Option. The grant of an Option pursuant
to the Plan shall not affect in any way the right or
5
<PAGE>
power of FHC or the Company to make adjustments, reclassification,
reorganizations or changes of its capital or business structure, to merge or
consolidate or to dissolve, liquidate, sell or transfer all or any part of its
business or assets.
SECTION IX. SECURITIES LAWS.
Shares shall not be issued under the Plan unless the issuance and
delivery of such Shares complies with (or is exempt from) all applicable
requirements of law, including (without limitation) the Securities Act of 1933,
as amended, the rules and regulations promulgated thereunder, state securities
laws and regulations, and the regulations of any stock exchange on which FHC's
securities may then be listed.
SECTION X. NO RIGHTS TO SERVICE.
No provision of the Plan, nor any Option granted under the Plan,
shall be construed to give any person any right to become, to be treated as, or
to remain an Employee. FHC, the Company and Subsidiaries and affiliates of the
Company and FHC reserve the right to terminate any person's Service at any time
and for any reason, subject to rights under employment agreements, if any.
SECTION XI. DURATION AND AMENDMENTS.
A. TERM OF THE PLAN. The Plan is effective as of October 1,
1993. The Plan shall terminate automatically on October 1, 2003 and may be
terminated on any earlier date pursuant to Subsection B below.
B. RIGHT TO AMEND OR TERMINATE THE PLAN. The Committee may
amend, suspend or terminate the Plan at any time and for any reason except the
consent of FHC shall be required to add shares available for the grant of
options.
C. EFFECT OF AMENDMENT OR TERMINATION. No Shares shall be
issued under the Plan after the termination thereof, except upon exercise of an
Option granted prior to such termination. The termination of the Plan, or any
amendment thereof, shall not affect any Share previously issued or any Option
previously granted under the Plan.
SECTION XII. EXECUTION.
FHC has caused its authorized officer to execute this amended and
restated Plan as of September 7, 1995.
FOUNDATION HEALTH CORPORATION
By __________________________________
Daniel D. Crowley
President and Chief Executive Officer
6
<PAGE>
PARTICIPATION AGREEMENT
Dated as of May 25, 1995
among
FOUNDATION HEALTH MEDICAL SERVICES,
as Construction Agent and as Lessee,
FOUNDATION HEALTH CORPORATION, as Guarantor,
FIRST SECURITY BANK OF UTAH, N.A.,
not individually, except as expressly
stated herein, but solely as Owner Trustee
under the FH Trust 1995-1
SUMITOMO BANK LEASING AND FINANCE, INC.
and
THE BANK OF NOVA SCOTIA
and
NATIONSBANK OF TEXAS, N.A.,
as Holders,
and
NATIONSBANK OF TEXAS, N.A.,
as Administrative Agent for the
Lenders
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION 1. THE LOANS. . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2. HOLDER ADVANCES . . . . . . . . . . . . . . . . . . . . . 1
SECTION 3. SUMMARY OF TRANSACTIONS. . . . . . . . . . . . . . . . . . 2
3.1. Operative Agreements. . . . . . . . . . . . . . . . . . . . 2
3.2. Property Purchase . . . . . . . . . . . . . . . . . . . . . 2
3.3. Construction of Improvements; Lease or
Disposition of Properties . . . . . . . . . . . . . . . . . 2
3.4. Holder Advances . . . . . . . . . . . . . . . . . . . . . . 3
SECTION 4. THE CLOSINGS . . . . . . . . . . . . . . . . . . . . . . . 3
4.1. Initial Closing Date. . . . . . . . . . . . . . . . . . . . 3
4.2. Initial Closing Date; Property Closing Dates. . . . . . . . 3
SECTION 5. FUNDING OF ADVANCES; REPORTING REQUIREMENTS ON COMPLETION DATE;
LESSEE DELIVERY OF NOTICES . . . . . . . . . . . . . . . . . . . . . . 3
5.1. General . . . . . . . . . . . . . . . . . . . . . . . . . . 3
5.2. Procedures for Funding. . . . . . . . . . . . . . . . . . . 3
5.3. Conditions to the Holders' and the Lenders' Obligations to
Advance funds for the Acquisition of Property . . . . . . . 4
5.4. Conditions to the Holders' and the Lenders' Obligations to Make
Construction Advances for the Commencement of Construction
of any Improvements . . . . . . . . . . . . . . . . . . . . 6
5.5. Conditions to the Holders' and the Lenders' Obligations to Make
Construction Advances for the Ongoing Construction
on any Property prior to the Construction Period Termination
Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.6. Advances Subsequent to Completion Date;
Reporting and Delivery Requirements on
Completion Date . . . . . . . . . . . . . . . . . . . . . . 8
5.7. Construction Agent Delivery of Allocation
Notice, Notice Regarding the Holder
Construction Property Cost and Construction
Budget Modifications. . . . . . . . . . . . . . . . . . . . 9
<PAGE>
SECTION 6. CONDITIONS OF THE INITIAL CLOSING. . . . . . . . . . . . . 9
6.1. Conditions to the Lessor's and the Holders' Obligations . . 9
6.2. Conditions to the Lessee's Obligations. . . . . . . . . . . 11
6.3. Conditions to the Obligations . . . . . . . . . . . . . . . 13
SECTION 7. REPRESENTATIONS AND WARRANTIES ON THE INITIAL CLOSING DATE . . . 13
7.1. Representations and Warranties of the Holders . . . . . . . 13
7.2. Representations and Warranties of the Owner
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.3. Representations and Warranties of the
Construction Agent and the Lessee . . . . . . . . . . . . . 18
7.4. Representations and Warranties of the Agent . . . . . . . . 22
SECTION 8. REPRESENTATIONS AND WARRANTIES ON FUNDING
DATES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
8.1. Representations and Warranties on Property
Closing Dates . . . . . . . . . . . . . . . . . . . . . . . 23
8.2. Representations and Warranties Upon Initial
Construction Advances . . . . . . . . . . . . . . . . . . . . . . 25
8.3. Representations and Warranties Upon the Date
of Each Construction Advance that is not an
Initial Advance . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 9. PAYMENT OF CERTAIN EXPENSES. . . . . . . . . . . . . . . . 28
9.1. Transaction Expenses. . . . . . . . . . . . . . . . . . . . 28
9.2. Brokers' Fees and Stamp Taxes . . . . . . . . . . . . . . . 29
9.3. Certain Fees and Expenses . . . . . . . . . . . . . . . . . 29
9.4. Unused Fee. . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 10. OTHER COVENANTS AND AGREEMENTS. . . . . . . . . . . . . . 30
10.1. Cooperation with the Construction Agent or the Lessee. . . 30
10.2. Covenants of the Owner Trustee and the Holders . . . . . . 30
10.3. Lessee and Guarantor Covenants, Consent and Acknowledgment 34
10.4. Sharing of Certain Payments. . . . . . . . . . . . . . . . 34
10.5. Grant of Easements, etc. . . . . . . . . . . . . . . . . . 35
10.6. Construction Period Termination Date . . . . . . . . . . . 35
SECTION 11. CREDIT AGREEMENT AND TRUST AGREEMENT. . . . . . . . . . . 36
11.1. Construction Agent's and Lessee's Credit
Agreement Rights . . . . . . . . . . . . . . . . . . . . . 36
11.2. Construction Agent's and Lessee's Trust
Agreement Rights . . . . . . . . . . . . . . . . . . . . . 37
SECTION 12. TRANSFER OF INTEREST. . . . . . . . . . . . . . . . . . . 37
12.1. Restrictions on Transfer . . . . . . . . . . . . . . . . . 37
12.2. Effect of Transfer . . . . . . . . . . . . . . . . . . . . 38
SECTION 13. INDEMNIFICATION.. . . . . . . . . . . . . . . . . . . . . 38
13.1. General Indemnity. . . . . . . . . . . . . . . . . . . . . 38
13.2. General Tax Indemnity. . . . . . . . . . . . . . . . . . . 41
13.3. Joint and Several Obligations of the Indemnity Provider. . 46
SECTION 14. MISCELLANEOUS.. . . . . . . . . . . . . . . . . . . . . . 46
14.1. Survival of Agreements . . . . . . . . . . . . . . . . . . 46
14.2. No Broker, etc . . . . . . . . . . . . . . . . . . . . . . 46
14.3. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . 46
14.4. Counterparts . . . . . . . . . . . . . . . . . . . . . . . 48
14.5. Amendments and Termination . . . . . . . . . . . . . . . . 48
14.6. Headings, etc. . . . . . . . . . . . . . . . . . . . . . . 48
14.7. Parties in Interest. . . . . . . . . . . . . . . . . . . . 48
14.8. GOVERNING LAW; SUBMISSION TO JURISDICTION;
WAIVER OF JURY TRIAL; FINAL AGREEMENT. . . . . . . . . . . 48
14.9. Severability . . . . . . . . . . . . . . . . . . . . . . . 49
14.10. Liability Limited. . . . . . . . . . . . . . . . . . . . . 50
14.11. Rights of Lessee . . . . . . . . . . . . . . . . . . . . . 51
14.12. Further Assurances . . . . . . . . . . . . . . . . . . . . 51
14.13. Calculations under Operative Agreements. . . . . . . . . . 52
14.14. Confidentiality. . . . . . . . . . . . . . . . . . . . . . 52
</TABLE>
<PAGE>
EXHIBITS
A - Forms of Requisition - Sections 4.2 and 5.2
B - Officer's Certificate - Section 5.6
C - Legal Opinion - Section 6.1(c)
D - Officer's Certificate - Section 6.1(g)
E - Officer's Certificate - Section 6.1(h)
F - Officer's Certificate - Section 6.2(d)
G - Officer's Certificate - Section 6.2(e)
H - Legal Opinion - Section 6.2(f)
I - Form of Limited Power of Attorney
<PAGE>
Appendix A Rules of Usage and Definitions
PARTICIPATION AGREEMENT
PARTICIPATION AGREEMENT, dated as of May 25, 1995 (this "Agreement"), is by
and among FOUNDATION HEALTH MEDICAL SERVICES, a California corporation ("Lessee"
or the "Construction Agent"); FOUNDATION HEALTH CORPORATION, a Delaware
corporation (the "Guarantor"), FIRST SECURITY BANK OF UTAH, N.A., a national
banking association, not individually (in its individual capacity, the "Trust
Company"), except as expressly stated herein, but solely as Owner Trustee under
the FH Trust 1995-1 (the "Owner Trustee" or the "Lessor"); NATIONSBANK OF TEXAS,
N.A., a national banking association, as Administrative Agent (in such capacity,
the "Agent") for the Lenders, the Lenders (as herein defined); and SUMITOMO BANK
LEASING AND FINANCE, INC., a Delaware corporation, THE BANK OF NOVA SCOTIA, a
Canadian corporation, and NATIONSBANK OF TEXAS, N.A., a national banking
association, as holders of the certificates issued with respect to the FH Trust
1995-1 (collectively, the "Holders" and individually, a "Holder"). Capitalized
terms used but not otherwise defined in this Agreement shall have the meanings
set forth in Appendix A hereto.
In consideration of the mutual agreements herein contained and other good
and valuable consideration, receipt of which is hereby acknowledged, the parties
hereto hereby agree as follows:
SECTION 1. THE LOANS.
The Lenders agree to make loans to the Lessor from time to time in an
aggregate principal amount of up to $58,200,000 in order for the Lessor to
acquire the Properties and certain Improvements and to develop and construct
certain improvements in accordance with the Agency Agreement and the terms and
provisions hereof, and in consideration of the receipt of such Loan proceeds,
the Lessor will issue the Notes (together with any note or notes issued in
exchange or substitution therefor in accordance with the Credit Agreement, the
"Notes"). The Loans shall be made and the Notes shall be issued pursuant to the
Credit Agreement. Pursuant to Section 5 of this Agreement and Section 2 of the
Credit Agreement, the Lenders agree to make the Loans from time to time at the
request of the Construction Agent in consideration for the Construction Agent
agreeing for the benefit of the Lessor, pursuant to the Agency Agreement, to
acquire the Properties, to acquire the Equipment, to construct certain
Improvements and to cause the Lessee to lease the Properties, each in accordance
with the Agency Agreement and the other Operative Agreements. The Loans and the
obligations of the Lessor under the Credit Agreement shall be secured by the
Collateral.
<PAGE>
SECTION 2. HOLDER ADVANCES.
Subject to the terms and conditions of this Agreement and in reliance on
the representations and warranties of each of the parties hereto contained
herein or made pursuant hereto on the Initial Closing Date, each Property
Closing Date and each other date Advances are made in accordance with Section 5
hereof, each Holder shall make a Holder Advance on a pro rata basis to the Owner
Trustee with respect to the FH Trust 1995-1 based on its Holder Commitment in an
amount in immediately available funds such that the aggregate of all Holder
Advances shall be three percent (3%) of the amount of the Advance being funded
on such date; provided, no Holder shall be obligated for any Holder Advance in
excess of its pro rata share of the Available Holder Commitment. No prepayment
or any other payment with respect to any Advance shall be permitted such that
the Holder Advance with respect to such Advance is less than 3% of the
outstanding amount of such Advance, except in connection with termination or
expiration of the Term or in connection with the exercise of remedies relating
to the occurrence of a Lease Event of Default. The representations, warranties,
covenants and agreements of the Holders herein and in the other Operative
Agreements are several, and not joint or joint and several.
SECTION 3. SUMMARY OF TRANSACTIONS.
A. OPERATIVE AGREEMENTS. On the date hereof (the "Initial Closing Date"),
each of the respective parties hereto and thereto shall execute and deliver this
Agreement, the Lease, the Guaranty Agreement, the Agency Agreement, the Credit
Agreement, the Trust Agreement, the Security Agreement and such other documents,
instruments, certificates and opinions of counsel as agreed to by the parties
hereto.
B. PROPERTY PURCHASE. On each Property Closing Date and subject to the
terms and conditions of this Agreement (a) the Holders will each make a Holder
Advance in accordance with Section 2 of this Agreement and the terms and
provisions of the Trust Agreement, (b) the Lenders will make Loans in accordance
with Section 5 of this Agreement and the terms and provisions of the Credit
Agreement, and (c) the Lessor will purchase the applicable Property identified
by the Construction Agent and grant the Agent a Lien on such Property by
execution of the required Security Documents.
C. CONSTRUCTION OF IMPROVEMENTS; LEASE OR DISPOSITION OF PROPERTIES.
Construction Advances will be made with respect to particular Improvements to be
constructed and with respect to ongoing construction of particular Improvements,
in each case, pursuant to the terms and conditions of this Agreement and the
Agency Agreement. The Construction Agent will act as a construction agent on
behalf of Lessor respecting the construction of such Improvements and the
expenditures of the Construction Advances related thereto. The Construction
Agent shall promptly notify Lessor upon Completion of the Improvements and at
such time Lessee shall execute and deliver to Lessor a Lease Supplement relating
to the particular Property, whereupon the Basic Term shall commence with respect
to such Property.
D. HOLDER ADVANCES. As more particularly provided in the Trust Agreement
and Section 8 of the Credit Agreement, at all times prior to the Maturity Date
or an Acceleration, the outstanding Holder Advances shall represent at least 3%
of the sum of the outstanding Loans plus outstanding Holder Advances.
SECTION 4. THE CLOSINGS.
A. INITIAL CLOSING DATE. All documents and instruments required to be
delivered on the Initial Closing Date shall be delivered at the offices of Moore
& Van Allen, Charlotte, North Carolina, or at such other location as may be
determined by the Lessor, the Agent and the Lessee.
B. INITIAL CLOSING DATE; PROPERTY CLOSING DATES; CONSTRUCTION ADVANCES.
The Construction Agent shall deliver to the Lessor and the Agent a requisition
(a "Requisition"), in the form attached hereto as EXHIBIT A or in such other
form as is reasonably satisfactory to the Lessor and the Agent, in connection
with (a) the Initial Closing Date relating to the Transaction Expenses and other
fees, expenses and disbursements payable by the Lessor pursuant to Section
9.1(a) with invoices (in form and substance acceptable to the Agent and the
Lessor) for such Transaction Expenses and other fees, expenses and disbursements
attached to such Requisition, (b) each Property Closing Date relating to each
Acquisition Advance pursuant to Section 5.3 and (c) each date of a Construction
Advance pursuant to Sections 5.4 or 5.5.
<PAGE>
SECTION 5. FUNDING OF ADVANCES; REPORTING REQUIREMENTS ON COMPLETION DATE;
LESSEE DELIVERY OF NOTICES.
A. GENERAL. To the extent funds have been made available to the Lessor
as Loans by the Lenders and Holder Advances by the Holders, the Lessor will use
such funds from time to time in accordance with the terms and conditions of this
Agreement and the other Operative Agreements (i) to pay interest regarding the
Loans relating to a Property and to pay the Holder Yield regarding the Holder
Advances relating to a Property, in each case to the extent accrued under the
Credit Agreement or Trust Agreement (as the case may be) during the period prior
to the Basic Term Commencement Date with respect to such Property, (ii) at the
direction of the Construction Agent to acquire Properties in accordance with the
terms of this Agreement, the Agency Agreement, the Lease and the other Operative
Agreements, and (iii) to make Advances to the Construction Agent to permit the
development, construction, modification and renovation, as applicable, of
Improvements in accordance with the terms of the Agency Agreement, the Lease and
the other Operative Agreements.
B. PROCEDURES FOR FUNDING. 1. The Construction Agent shall designate the
date for the initial Advance in accordance with the requirements of this
Agreement, and thereafter, each and every Advance shall be made on a Scheduled
Interest Payment Date. Not less than three (3) Business Days prior to each date
on which an Advance is to be made, the Construction Agent shall deliver to the
Lessor and the Agent, (A) on the Initial Closing Date and on each Property
Closing Date, a Requisition as described in Section 4.2 hereof (including
without limitation a legal description of the Land, a schedule of the
Improvements and a schedule of the Equipment acquired on such date, each of the
foregoing in a form reasonably acceptable to the Lessor and the Agent) and (B)
on each date for a Construction Advance, a Requisition identifying (among other
things) the Work performed for which an Advance is requested and the Property to
which such Work relates.
<PAGE>
2. Each Requisition shall: (i) be irrevocable, (ii) request an
amount that is not in excess of the total aggregate of the Available
Commitments plus the Available Holder Commitments at such time, and (iii)
request that the Holder make a Holder Advance and that the Lenders make
Loans to the Lessor for the payment of the Property Acquisition Costs (in
the case of a Property Closing Date) or other Property Costs (in the case
of a Construction Advance) that have previously been incurred and were not
the subject of a prior Requisition, in each case as specified in the
Requisition.
3. So long as no Default or Event of Default has occurred and is
continuing and subject to the Lessor and the Agent having each received the
materials required by Sections 5.3, 5.4 or 5.5, as applicable, on each
Property Closing Date or the date on which the Construction Advance is to
be made, as applicable, (i) the Lenders shall make Loans to the Lessor in
an aggregate amount equal to 97% of the Requested Funds specified in any
Requisition, up to an aggregate principal amount equal to the Available
Commitments, (ii) each Holder shall make a pro rata Holder Advance based on
its Holder Commitment in an amount such that the aggregate of all Holder
Advances at such time shall be 3% of the balance of the Requested Funds
specified in such Requisition, provided no such Holder Advance shall exceed
such Holder's pro rata share of the Available Holder Commitments; and (iii)
the total amount of such Loans and Holder Advances made on such date shall
(x) be used by the Lessor to pay the Property Acquisition Costs (in the
case of a Property Closing Date), (y) be used by the Lessor to pay interest
regarding the Loans and to pay the Holder Yield regarding the Holder
Advances relating to a Property, in each case to the extent accrued under
the Credit Agreement or Trust Agreement (as the case may be) during the
period prior to the Basic Term Commencement Date with respect to such
Property, or (z) be advanced by the Lessor to the Construction Agent or the
Lessee to pay Property Costs, as applicable.
C. CONDITIONS TO THE HOLDERS' AND THE LENDERS' OBLIGATIONS TO ADVANCE
FUNDS FOR THE ACQUISITION OF PROPERTY. The obligations of the Holders to make a
Holder Advance, and of the Lenders to make Loans to the Lessor, on a Property
Closing Date for the purpose of providing funds to the Lessor necessary to pay
the Transaction Expenses, fees, expenses and other disbursements payable by
Lessor under Section 9.1(b) of this Agreement and to acquire a Property (an
"Acquisition Advance") are subject to the prior or contemporaneous satisfaction
or waiver of the following conditions:
1. the correctness on such Property Closing Date of the
representations and warranties of the Owner Trustee, the Construction
Agent, the Lessee, the Guarantor and the Holders contained herein and in
each of the other Operative Agreements;
2. [intentionally omitted];
3. the Agent and the Owner Trustee shall have received a fully
executed counterpart of the Requisition, appropriately completed;
4. [intentionally omitted];
5. the Construction Agent shall have delivered to the Lessor a Deed
with respect to the Land and existing Improvements, respecting such of the
foregoing as are being acquired on such Property Closing Date to the
Lessor, and such Land and existing Improvements shall be located in an
Approved State;
<PAGE>
6. there shall not have occurred and be continuing any Default or
Event of Default under any of the Operative Agreements and no Default or
Event of Default under any of the Operative Agreements will have occurred
after giving effect to the Advance requested by such Requisition;
7. the Construction Agent shall have delivered to the Agent and the
Owner Trustee, title insurance policies in favor of the Owner Trustee and
the Agent in form and substance acceptable to the Owner Trustee and the
Agent, with such title exceptions thereto as are acceptable to the Owner
Trustee and the Agent (it being agreed by the Owner Trustee and the Agent
that title exceptions of the nature of or similar to those disclosed on
title insurance policies reviewed by the Agent prior to the Initial Closing
Date will be acceptable to the Owner Trustee and the Agent);
8. the Construction Agent shall have delivered to the Agent and the
Owner Trustee (i) a Phase I environmental site assessment and (ii) a
survey, in each case prepared by an independent recognized professional
acceptable to the Agent and the Owner Trustee and in a form and substance
that satisfies all applicable Legal Requirements and is otherwise
acceptable to the Agent and the Owner Trustee;
9. the Construction Agent shall have caused to be delivered to the
Agent and the Owner Trustee a legal opinion (in form and substance
satisfactory to the Agent and the Owner Trustee) from counsel located in
the state where the Property is located or, if the Agent and the Owner
Trustee have previously received an opinion from counsel in such state, the
Agent and the Owner Trustee (in their discretion) may accept an update or a
reaffirmation of the previous opinion;
10. the Owner Trustee and the Agent shall be satisfied, in their
discretion, that the acquisition of the Property and the execution of the
Mortgage Instrument and the other Security Documents will not adversely
affect the rights of the Owner Trustee, the Holders, the Agent or the
Lenders under or with respect to the Operative Agreements in effect as of
the applicable Property Closing Date (it being understood and acknowledged
that the Agent and the Owner Trustee may require that the Construction
Agent deliver an acceptable legal opinion in connection with this
condition); and
11. the Lessor shall have delivered to the Agent and there shall have
been recorded by the Agent a Mortgage Instrument and Lender Financing
Statements respecting such Property, each in a form acceptable to the
Agent.
D. CONDITIONS TO THE HOLDERS' AND THE LENDERS' OBLIGATIONS TO MAKE
CONSTRUCTION ADVANCES FOR THE COMMENCEMENT OF CONSTRUCTION OF ANY IMPROVEMENTS.
The obligations of the Holders to make a Holder Advance, and the Lenders to make
Loans to the Lessor for the purpose of providing funds to the Lessor necessary
to pay the Transaction Expenses, fees, expenses and other disbursements payable
by Lessor under Section 9.1(b) of this Agreement, to make an Initial
Construction Advance or to pay interest regarding the Loans relating to a
Property and to pay the Holder Yield regarding the Holder Advances relating to a
Property, in each case regarding such interest and Holder Yield to the extent
accrued and payable under the Credit Agreement or Trust Agreement (as the case
may be), during the period prior to the Basic Term Commencement Date with
respect to such Property, are subject to the satisfaction or waiver of the
following conditions precedent:
1. the correctness on such date of the representations and
warranties of the Owner Trustee, the Construction Agent, the Lessee, the
Guarantor, and the Holders contained herein and in each of the other
Operative Agreements;
2. [intentionally omitted];
3. the Agent and the Owner Trustee shall have received a fully
executed counterpart of the Requisition;
4. with respect to each Initial Construction Advance, the Agent and
the Owner Trustee shall have received a copy of the Construction Budget for
each Property for the completion of the Improvements for which such Advance
relates and a copy of the Plans and Specifications for each such Property
for which such Advance relates;
5. with respect to each Initial Construction Advance, the title
insurance policy delivered in connection with the requirements of Section
5.3(g) shall provide for (or shall be endorsed to provide for) insurance in
an amount at least equal to the maximum total Property Cost indicated by
the Construction Budget referred to in subparagraph (d) above;
6. there shall not have occurred and be continuing any Default or
Event of Default under any of the Operative Agreements and no Default or
Event of Default under any of the Operative Agreements will have occurred
after giving effect to the Advance requested by such Requisition; and
7. with respect to each Initial Construction Advance, based upon
Construction Budgets which satisfy the requirements of subparagraph (d)
above, the Available Commitment and the Available Holder Commitment (after
deducting the Unfunded Amount) will be sufficient to complete the
Improvements.
<PAGE>
E. CONDITIONS TO THE HOLDERS' AND THE LENDERS' OBLIGATIONS TO MAKE
CONSTRUCTION ADVANCES FOR THE ONGOING CONSTRUCTION ON ANY PROPERTY PRIOR TO THE
CONSTRUCTION PERIOD TERMINATION DATE. The obligations of the Holders to make a
Holder Advance, and the Lenders to make Loans, to the Lessor, in connection with
all subsequent requests for Advances to pay the Transaction Expenses, fees,
expense and other disbursements payable by Lessor under Section 9.1(b) of this
Agreement, to pay interest regarding the Loans relating to a Property and to pay
the Holder Yield regarding the Holder Advances relating to a Property, in each
case regarding such interest and Holder Yield to the extent accrued and payable
under the Credit Agreement or Trust Agreement (as the case may be), during the
period prior to the Basic Term Commencement Date with respect to such Property
and to pay Property Costs with respect to any Property prior to the Construction
Period Termination Date are subject to the satisfaction or waiver of the
following conditions precedent:
(a) the correctness on such date of the representations and
warranties of the Owner Trustee, the Construction Agent, the Lessee, the
Guarantor and the Holders contained herein and in each of the other
Operative Agreements;
(b) the performance by the Construction Agent and the Lessee hereto
of their respective agreements contained herein and in the other Operative
Agreements and to be performed by them on or prior to each such date;
(c) the Agent and the Owner Trustee shall have received a fully
executed counterpart of the Requisition, appropriately completed;
(d) based upon Construction Budgets which satisfy the requirements of
Section 5.4(d) of this Agreement, the Available Commitments and the
Available Holder Commitment (after deducting the Unfunded Amount) will be
sufficient to complete the Improvements; and
(e) there shall not have occurred and be continuing any Default or
Event of Default under any of the Operative Agreements and no Default or
Event of Default under any of the Operative Agreements will have occurred
after giving effect to the Construction Advance requested by such
Requisition.
F. ADVANCES SUBSEQUENT TO COMPLETION DATE; REPORTING AND DELIVERY
REQUIREMENTS ON COMPLETION DATE. (a) The parties hereto acknowledge and agree
that Construction Advances may be requested for a Property after the Completion
Date for such Property, either to pay for Improvements constructed prior to such
Completion Date for which invoices are not available until after the Completion
Date or to pay for the construction of additional Improvements after the
Completion Date; provided, however, (i) in no event shall such a Construction
Advance be made after the Construction Period Termination Date, and (ii) any
such Construction Advance made for the construction of Improvements after the
Completion Date shall also require the compliance by the Lessee with the terms
of Section 11.1 of the Lease. Within sixty (60) days after the Completion Date
for each Property, the Construction Agent shall deliver to the Agent and the
Owner Trustee an Officer's Certificate in the form attached hereto as EXHIBIT B
specifying (y) the Completion Date for the construction of Improvements at the
Property and (z) the aggregate Property Cost for the Property incurred through
the Completion Date (with supporting documentation to the extent reasonably
requested by the Agent). Such Officer's Certificate shall also include, in form
reasonably acceptable to the Agent and the Holders, a certification to the
effect that all Improvements have been constructed substantially in accordance
with all applicable Legal Requirements, in a good and workmanlike manner and
otherwise substantially in compliance with the standards and practices of the
Construction Agent with respect to properties and improvements owned by the
Construction Agent. If additional Improvements are constructed after the
Completion Date of such Property as referred to in the first sentence of this
Section 5.6, then such Officer's Certificate shall be updated and resubmitted to
the Agent and the Owner Trustee within sixty (60) days after the completion of
such additional Improvements.
(b) Within thirty (30) days after the Completion Date for each Property
the Construction Agent shall deliver to the Agent an Appraisal for such
Property, which Appraisal shall indicate an appraised value for such Property of
at least eighty percent (80%) of the Property Cost for such Property.
(c) Within thirty (30) days after the Completion Date for each Property,
the Construction Agent shall deliver originals of the following to the Agent
(and copies thereof to the Owner Trustee) each of which shall be in a form
reasonably acceptable to the Agent: (i) a Lease Supplement, (ii) a memorandum
of lease with respect to such Lease Supplement (in form suitable for recording),
and (iii) Lessor Financing Statements executed by the Lessee and the Lessor.
<PAGE>
G. CONSTRUCTION AGENT DELIVERY OF ALLOCATION NOTICE, NOTICE REGARDING THE
HOLDER CONSTRUCTION PROPERTY COST AND CONSTRUCTION BUDGET MODIFICATIONS. The
Construction Agent covenants and agrees to deliver (i) to the Agent each month
during the Commitment Period the Allocation Notice referred to in the first
sentence of Section 2.3(b) of the Credit Agreement, (ii) to the Owner Trustee
each month during the Commitment Period a notice specifying the Holder
Construction Property Cost of each of the Construction Period Properties for
which an Advance was requested during such months and (iii) to the Agent and the
Owner Trustee each month any modification to any Construction Budget regarding
any Property; provided, no Construction Budget may be increased unless the title
insurance policies referenced in Section 5.3(g) are also modified or endorsed,
if necessary, to provide for insurance in an amount that satisfies the
requirements of Section 5.4(e) of this Agreement.
SECTION 6. CONDITIONS OF THE INITIAL CLOSING.
A. CONDITIONS TO THE LESSOR'S AND THE HOLDERS' OBLIGATIONS. The
obligations of the Lessor and the Holders to consummate the transactions
contemplated by this Agreement, including the obligation to execute and deliver
the applicable Operative Agreements to which each is a party on the Initial
Closing Date, are subject to (i) the accuracy and correctness on the Initial
Closing Date of the representations and warranties of the other parties hereto
contained herein, (ii) the accuracy and correctness on the Initial Closing Date
of the representations and warranties of the other parties hereto contained in
any other Operative Agreement or certificate delivered pursuant hereto or
thereto, (iii) the performance by the other parties hereto of their respective
agreements contained herein and in the other Operative Agreements and to be
performed by them on or prior to the Initial Closing Date and (iv) the
satisfaction or waiver by the Lessor and the Holders of all of the following
conditions on or prior to the Initial Closing Date:
(a) Each of the Operative Agreements to be entered into on the
Initial Closing Date shall have been duly authorized, executed and
delivered by the parties thereto, other than the Lessor, and shall be in
full force and effect, and no default shall exist thereunder (both before
and after giving effect to the transactions contemplated by the Operative
Agreements), and the Lessor shall have received a fully executed copy of
each of the Operative Agreements (other than the Notes of which it shall
have received specimens). The Operative Agreements (or memoranda thereof),
any supplements thereto and any financing statements and fixture filings in
connection therewith required under the Uniform Commercial Code shall have
been filed, if necessary, in such manner as to enable the Lessee's counsel
to render its opinion referred to in Section 6.1(c) hereof;
(b) All taxes, fees and other charges in connection with the
execution, delivery, recording, filing and registration of the Operative
Agreements shall have been paid or provisions for such payment shall have
been made to the satisfaction of the Lessor and the Agent;
(c) Counsel for the Lessee and the Guarantor acceptable to the other
parties hereto shall have issued to the Lessor, the Agent, the Lenders and
the Holders its opinion in the form attached hereto as EXHIBIT C or in such
other form as is reasonably acceptable to such parties;
(d) All Governmental Actions necessary (or in the reasonable opinion
of the Agent or its counsel, advisable) in connection with the transactions
described herein, in each case required by any law or regulation enacted,
imposed or adopted on or after the date hereof or by any change in fact or
circumstances since the date hereof, shall have been obtained or made and
be in full force and effect;
(e) No action or proceeding shall have been instituted, nor shall any
action or proceeding be overtly threatened, before any Governmental
Authority, nor shall any order, judgment or decree have been issued or
proposed to be issued by any Governmental Authority or to set aside,
restrain, enjoin or prevent the full performance of this Agreement, any
other Operative Agreement or any transaction contemplated hereby or thereby
which is reasonably likely to have a Material Adverse Effect;
(f) In the reasonable opinion of the Lessor and the Holders and their
counsel, the transactions contemplated by the Operative Agreements do not
and will not violate any material Legal Requirements and do not and will
not subject the Lessor or the Holders to any adverse regulatory
prohibitions or constraints, in each case enacted, imposed, adopted or
proposed since the date hereof;
(g) The Lessor and the Agent shall each have received an Officer's
Certificate, dated as of the Initial Closing Date, of the Lessee and the
Guarantor in the form attached hereto as EXHIBIT D or in such other form as
is reasonably acceptable to such parties stating that (a) each and every
representation and warranty of the Lessee contained in the Operative
Agreements to which it is a party is true and correct in all material
respects on and as of the Initial Closing Date; (b) no Default or Event of
Default has occurred and is continuing under any Operative Agreement; (c)
each Operative Agreement to which Lessee or the Guarantor is a party is in
full force and effect with respect to it; and (d) the Lessee and the
Guarantor have duly performed and complied with all material covenants,
agreements and conditions contained herein or in any Operative Agreement
required to be performed or complied with by them on or prior to the
Initial Closing Date;
(h) The Lessor and the Agent shall each have received (a) a
certificate of the Secretary or an Assistant Secretary of Lessee and the
Guarantor in the form attached hereto as EXHIBIT E or in such other form as
is reasonably acceptable to such parties attaching and certifying as to (1)
the resolutions of its Board of Directors duly authorizing the execution,
delivery and performance by Lessee and the Guarantor, as applicable, of
each of the Operative Agreements to which it is or will be a party, (2)
its certificate of incorporation certified as of a recent date by the
Secretary of State of the State of its incorporation and its by-laws, and
(3) the incumbency and signature of persons authorized to execute and
deliver on its behalf the Operative Agreements to which it is a party and
(b) a good standing certificate from the appropriate officer of each state
in which it is required to be qualified to do business as to its good
standing in such state; and
<PAGE>
(i) As of the Initial Closing Date, there shall not have occurred any
material adverse change in the consolidated assets, liabilities,
operations, business or financial condition of the Lessee or the Guarantor
from that set forth in Guarantor's consolidated financial statements dated
December 31, 1994.
B. CONDITIONS TO THE LESSEE'S OBLIGATIONS. The obligation of the Lessee
to consummate the transactions contemplated by this Agreement, including the
obligation to execute and deliver the Operative Agreements to which it is a
party on the Initial Closing Date, is subject to (i) the accuracy and
correctness on the Initial Closing Date of the representations and warranties of
the other parties hereto contained herein, (ii) the accuracy and correctness on
the Initial Closing Date of the representations and warranties of the other
parties hereto contained in any other Operative Agreement or certificate
delivered pursuant hereto or thereto, (iii) the performance by the other parties
hereto of their respective agreements contained herein and in the other
Operative Agreements, in each case to be performed by them on or prior to the
Initial Closing Date, and (iv) the satisfaction or waiver by the Lessee of all
of the following conditions on or prior to the Initial Closing Date:
(a) In the reasonable opinion of the Lessee and its counsel, the
transactions contemplated by the Operative Agreements do not violate any
Legal Requirements and shall not subject Lessee to any adverse regulatory
prohibitions or constraints, in each case enacted, imposed, adopted or
proposed since the date hereof;
(b) No action or proceeding shall have been instituted nor shall any
action or proceeding be threatened, before any Governmental Authority, nor
shall any order, judgment or decree have been issued or proposed to be
issued by any Governmental Authority or to set aside, restrain, enjoin or
prevent the full performance of this Agreement, any other Operative
Agreement or any transaction contemplated hereby or thereby which is
reasonably likely to have a Material Adverse Effect;
(c) Each of the Operative Agreements shall have been duly authorized,
executed and delivered by the parties thereto, other than the Lessee, and
shall be in full force and effect, and no Default, other than Defaults of
the Lessee, shall exist thereunder, and the Lessee shall have received a
fully executed copy of each of the Operative Agreements;
(d) The Lessee and the Agent shall have received an Officer's
Certificate of the Lessor dated as of such Closing Date in the form
attached hereto as EXHIBIT F or in such other form as is reasonably
acceptable to Lessee and the Agent, stating that (i) each and every
representation and warranty of the Lessor contained in the Operative
Agreements to which it is a party is true and correct on and as of the
Initial Closing Date; (ii) each Operative Agreement to which the Lessor is
a party is in full force and effect with respect to it, and (iii) the
Lessor has duly performed and complied with all covenants, agreements and
conditions contained herein or in any Operative Agreement required to be
performed or complied with by it on or prior to the Initial Closing Date;
(e) The Lessee and the Agent shall have received (i) a certificate of
the Secretary, an Assistant Secretary, Trust Officer or Vice President of
the Lessor in the form attached hereto as EXHIBIT G or in such other form
as is reasonably acceptable to Lessee and the Agent, attaching and
certifying as to (A) the signing resolutions, (B) its articles of
incorporation or other equivalent charter documents, as the case may be,
certified as of a recent date by an appropriate officer of the Trust
Company, (C) its by-laws and (D) the incumbency and signature of persons
authorized to execute and deliver on its behalf the Operative Agreements to
which it is a party and (ii) a good standing certificate from the state of
incorporation of the Trust Company; and
(f) Counsel for the Lessor acceptable to the other parties hereto
shall have issued to the Lessee, the Holders, the Lenders and the Agent its
opinion in the form attached hereto as EXHIBIT H or in such other form as
is reasonably acceptable to such parties.
C. CONDITIONS TO THE OBLIGATIONS OF THE AGENT AND THE LENDERS. The
obligation of the Agent and each Lender to consummate the transactions
contemplated by this Agreement on the Initial Closing Date, including the
obligation to execute and deliver each of the Operative Agreements to which each
such entity is a party on the Initial Closing Date, is subject to (i) the
accuracy and correctness on the Initial Closing Date of the representations and
warranties of the other parties hereto contained herein, (ii) the accuracy and
correctness on the Initial Closing Date of the representations and warranties of
the other parties hereto contained in any other Operative Agreement or
certificate delivered pursuant hereto or thereto, (iii) the performance by the
other parties hereto of their respective agreements contained herein and in the
other Operative Agreements, in each case to be performed by them on or prior to
the Initial Closing Date, and (iv) the receipt by the Agent of the items
required to be delivered to the Agent pursuant to this Article 6.
SECTION 7. REPRESENTATIONS AND WARRANTIES ON THE INITIAL CLOSING DATE.
<PAGE>
A. REPRESENTATIONS AND WARRANTIES OF THE HOLDERS. Effective as of the
Initial Closing Date, each Holder severally as to itself, and not jointly,
represents and warrants to each of the other parties hereto that:
(a) (i) Sumitomo Bank Leasing and Finance, Inc. is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has the power and authority to carry on
its business as now conducted and to enter into and perform its obligations
under each Operative Agreement to which it is or is to be a party and each
other agreement, instrument and document to be executed and delivered by it
on or before each Closing Date in connection with or as contemplated by
each such Operative Agreement to which it is or will be a party;
(ii) The Bank of Nova Scotia is a corporation duly
organized, validly existing and in good standing under the laws of
Canada and has the power and authority to carry on its business as now
conducted and to enter into and perform its obligations under each
Operative Agreement to which it is or is to be a party and each other
agreement, instrument and document to be executed and delivered by it
on or before each Closing Date in connection with or as contemplated
by each such Operative Agreement to which it is or will be a party;
(iii) NationsBank of Texas, N.A. is a national banking
association, validly existing and in good standing under the federal
banking laws of the United States and has the power and authority to
carry on its business as now conducted and to enter into and perform
its obligations under each Operative Agreement to which it is or is to
be a party and each other agreement, instrument and document to be
executed and delivered by it on or before each Closing Date in
connection with or as contemplated by each such Operative Agreement to
which it is or will be a party;
(b) The execution, delivery and performance of each Operative
Agreement to which it is or will be a party have been duly authorized by
all necessary action on its part and neither the execution and delivery
thereof, nor the consummation of the transactions contemplated thereby, nor
compliance by it with any of the terms and provisions thereof (i) requires
or will require any approval of the partners or stockholders of, or
approval or consent of any trustee or holder of any indebtedness or
obligations of, such Holder which have not been obtained, (ii) contravenes
or will contravene any Legal Requirement applicable to or binding on it
(except no representation or warranty is made as to any Legal Requirement
to which it may be subject solely as a result of the activities of the
Lessee) as of the date hereof, (iii) does or will contravene or result in
any breach of or constitute any default under, or result in the creation of
any Lien upon any Property or any of the Improvements (other than Liens
created by the Operative Agreements) under its certificate of incorporation
or other equivalent charter documents, as the case may be, or any
indenture, mortgage, chattel mortgage, deed of trust, conditional sales
contract, bank loan or credit agreement or other agreement or instrument to
which it is a party or by which it or its properties is bound or affected
or (iv) does or will require any Governmental Action by any Governmental
Authority (other than arising solely by reason of the business, condition
or activities of the Lessee or any Affiliate thereof or the construction or
use of the Properties or the Improvements);
(c) Each Operative Agreement to which it is or will be a party has
been, or will be, duly executed and delivered by it and constitutes, or
upon execution and delivery will constitute, a legal, valid and binding
obligation enforceable against it in accordance with the terms thereof;
(d) There is no action or proceeding pending or, to its knowledge,
threatened against it before any Governmental Authority that questions the
validity or enforceability of any Operative Agreement to which it is or
will become a party or that, if adversely determined, would materially and
adversely affect its ability to perform its obligations under the Operative
Agreements to which it is a party;
(e) It has not assigned or transferred any of its right, title or
interest in or under the Lease except in accordance with the Operative
Agreements;
(f) No Default or Event of Default under the Operative Agreements
attributable to it has occurred and is continuing;
(g) It is not a "holding company" or a "subsidiary company" of a
"holding company" or an "affiliate" of a "holding company' or a "public
utility" within the meaning of the Public Utility Holding Company Act of
1935, as amended, or a "public utility" within the meaning of the Federal
Power Act, as amended. It is not an "investment company" or a company
controlled by an "investment company" within the meaning of the Investment
Company Act or an "investment adviser" within the meaning of the Investment
Advisers Act of 1940, as amended;
(h) Except as otherwise contemplated by the Operative Agreements, it
shall not, nor shall it direct the Owner Trustee to, use the proceeds of
any Holder Advance for any purpose other than the purchase and/or lease of
Properties, the construction of Improvements and the payment of the Holder
Yield regarding the Holder Advances which accrues under the Trust Agreement
prior to the Basic Term Commencement Date with respect to a particular
Property; and
(i) It is acquiring its interest in the Trust Estate for its own
account for investment and not with a view to any distribution (as such
term is used in Section 2(11) of the Securities Act) thereof, and if in the
future it should decide to dispose of its interest in the Trust Estate, it
understands that it may do so only in compliance with the Securities Act
and the rules and regulations of the Securities and Exchange Commission
thereunder and any applicable state securities laws. Neither it nor anyone
authorized to act on its behalf has taken or will take any action which
would subject the issuance or sale of any interest in the Property, the
Trust Estate or the Lease to the registration requirements of Section 5 of
the Securities Act. No representation or warranty contained in this
Section 7.1(i) shall include or cover any action or inaction of any Lessee
or any Affiliate thereof whether or not purportedly on behalf of the
Holders, the Owner Trustee or any of their Affiliates.
<PAGE>
B. REPRESENTATIONS AND WARRANTIES OF THE OWNER TRUSTEE. Effective as of
the Initial Closing Date, Trust Company in its individual capacity and as the
Owner Trustee, as indicated, represents and warrants to each of the other
parties hereto as follows, provided, that the representations in the following
paragraphs (h), (i), (j) and (k) are made solely in its capacity as the Owner
Trustee:
(a) It is a national banking association and is duly organized and
validly existing and in good standing under the laws of the United States
of America and has the power and authority to enter into and perform its
obligations under the Trust Agreement and (assuming due authorization,
execution and delivery of the Trust Agreement by the Holders) has the
corporate and trust power and authority to act as the Owner Trustee and to
enter into and perform the obligations under each of the other Operative
Agreements to which Trust Company or the Owner Trustee, as the case may be,
is or will be a party and each other agreement, instrument and document to
be executed and delivered by it on or before such Closing Date in
connection with or as contemplated by each such Operative Agreement to
which Trust Company or the Owner Trustee, as the case may be, is or will be
a party;
(b) The execution, delivery and performance of each Operative
Agreement to which it is or will be a party, either in its individual
capacity or (assuming due authorization, execution and delivery of the
Trust Agreement by the Holders) as the Owner Trustee, as the case may be,
has been duly authorized by all necessary action on its part and neither
the execution and delivery thereof, nor the consummation of the
transactions contemplated thereby, nor compliance by it with any of the
terms and provisions thereof (i) does or will require any approval or
consent of any trustee or holders of any of its indebtedness or
obligations, (ii) does or will contravene any current law, governmental
rule or regulation relating to its banking or trust powers, (iii) does or
will contravene or result in any breach of or constitute any default under,
or result in the creation of any Lien upon any of its property under, (A)
its charter or by-laws, or (B) any indenture, mortgage, chattel mortgage,
deed of trust, conditional sales contract, bank loan or credit agreement or
other agreement or instrument to which it is a party or by which it or its
properties may be bound or affected, which contravention, breach, default
or Lien under clause (B) would materially and adversely affect its ability,
in its individual capacity or as Owner Trustee, to perform its obligations
under the Operative Agreements to which it is a party or (iv) does or will
require any Governmental Action by any Governmental Authority regulating
its banking or trust powers;
(c) The Trust Agreement and, assuming the Trust Agreement is the
legal, valid and binding obligation of the Holders, each other Operative
Agreement to which Trust Company or the Owner Trustee, as the case may be,
is or will be a party have been, or on or before such Closing Date will be,
duly executed and delivered by Trust Company or the Owner Trustee, as the
case may be, and the Trust Agreement and each such other Operative
Agreement to which Trust Company or the Owner Trustee, as the case may be,
is a party constitutes, or upon execution and delivery will constitute, a
legal, valid and binding obligation enforceable against Trust Company or
the Owner Trustee, as the case may be, in accordance with the terms
thereof;
(d) There is no action or proceeding pending or, to its knowledge,
threatened to which it is or will be a party, either in its individual
capacity or as the Owner Trustee, before any Governmental Authority that,
if adversely determined, would materially and adversely affect its ability,
in its individual capacity or as Owner Trustee, to perform its obligations
under the Operative Agreements to which it is a party or would question the
validity or enforceability of any of the Operative Agreements to which it
is or will become a party;
(e) It has not assigned or transferred any of its right, title or
interest in or under the Lease or the Agency Agreement except in accordance
with the Operative Agreements;
(f) No Default or Event of Default under the Operative Agreements
attributable to it has occurred and is continuing;
(g) Except as otherwise contemplated in the Operative Agreements, the
proceeds of the Loans and Holder Advances have not been applied by the
Owner Trustee for any purpose other than the payment of Transaction
Expenses and the fees, expenses and other disbursements referenced in
Sections 9.1(a) and (b) of this Agreement, the purchase and/or lease of the
Properties, the acquisition of Equipment, the construction of Improvements
and the payment of interest regarding the Loans and the payment of the
Holder Yield regarding the Holder Advances, in each case to the extent
accrued under the Credit Agreement or Trust Agreement (as the case may be),
during the period prior to the Basic Term Commencement Date with respect to
a particular Property;
(h) Neither the Owner Trustee nor any Person authorized by the Owner
Trustee to act on its behalf has offered or sold any interest in the Trust
Estate or the Notes, or in any similar security relating to a Property, or
in any security the offering of which for the purposes of the Securities
Act would be deemed to be part of the same offering as the offering of the
aforementioned securities to, or solicited any offer to acquire any of the
same from, any Person other than, in the case of the Notes, the Agent, and
neither the Owner Trustee nor any Person authorized by the Owner Trustee to
act on its behalf will take any action which would subject, as a direct
result of such action alone, the issuance or sale of any interest in the
Trust Estate or the Notes to the provisions of Section 5 of the Securities
Act or require the qualification of any Operative Agreement under the Trust
Indenture Act of 1939, as amended;
(i) The Owner Trustee's chief place of business, chief executive
office and office where the documents, accounts and records relating to the
transactions contemplated by this Agreement and each other Operative
Agreement are kept are located at 79 South Main Street, Salt Lake City,
Utah 84111;
<PAGE>
(j) The Owner Trustee is not engaged principally in, and does not
have as one of its important activities, the business of extending credit
for the purpose of purchasing or carrying any margin stock (within the
meaning of Regulation U of the Board of Governors of the Federal Reserve
System of the United States), and no part of the proceeds of the Loans or
the Holder Advances will be used by it to purchase or carry any margin
stock or to extend credit to others for the purpose of purchasing or
carrying any such margin stock or for any purpose that violates, or is
inconsistent with, the provisions of Regulations G, T, U, or X of the Board
of Governors of the Federal Reserve System of the United States; and
(k) The Owner Trustee is not an "investment company" or a company
controlled by an "investment company" within the meaning of the Investment
Company Act.
C. REPRESENTATIONS AND WARRANTIES OF THE CONSTRUCTION AGENT AND THE
LESSEE. Effective as of the Initial Closing Date the Construction Agent and the
Lessee represent and warrant to each of the other parties hereto that:
(a) Each of the Construction Agent and the Lessee is a corporation
duly organized, validly existing and in good standing under the laws of the
State of California; each of their Subsidiaries is duly organized and
validly existing under the laws of the jurisdiction of its organization;
and each of the Construction Agent and the Lessee and each of their
Subsidiaries is duly qualified to do business in each other jurisdiction
where the nature of its business makes such qualification necessary, except
where such failure to so qualify would not have a Material Adverse Effect.
(b) The execution and delivery by each of the Construction Agent and
the Lessee of this Agreement and the other Operative Agreements to which
the Construction Agent or the Lessee is a party and the performance by each
of the Construction Agent and the Lessee of its respective obligations
under this Agreement and the other Operative Agreements to which it is a
party is within the corporate powers of each of the Construction Agent and
the Lessee, has been duly authorized by all necessary corporate action on
the part of each of the Construction Agent and the Lessee (including any
necessary shareholder action), has received all governmental approval (to
the extent necessary as of the Initial Closing Date), and does not and will
not (i) violate any provision of applicable Law, decree, judgment or award
which is binding on each of the Construction Agent and the Lessee or any of
their Subsidiaries where such violation would be likely to have a Material
Adverse Effect, (ii) contravene or conflict with, or result in a breach of,
any provision of the Certificate of Incorporation, By-Laws or other
organizational documents of either the Construction Agent or the Lessee or
any of their Subsidiaries or of any agreement, indenture, instrument or
other document which is binding on either of the Construction Agent or the
Lessee or any of their Subsidiaries or (iii) result in, or require, the
creation or imposition of any Lien (other than a Permitted Lien or as
otherwise permitted pursuant to the terms of the Operative Agreements) on
any asset of either of the Construction Agent or the Lessee or any of their
Subsidiaries.
(c) This Agreement is, and upon the execution and delivery thereof
the other Operative Agreements to which the Construction Agent or the
Lessee is a party will be, the legal, valid and binding obligation of each
of the Construction Agent and the Lessee, enforceable against each of the
Construction Agent and the Lessee in accordance with their terms, subject
to applicable bankruptcy and insolvency laws and principles of equity. The
Construction Agent and the Lessee have each executed the various Operative
Agreements required to be executed as of the Initial Closing Date.
(d) There no actions, suits or proceedings pending or, to the
knowledge of the Construction Agent or the Lessee, overtly threatened with
respect to Lessee that are reasonably likely to have a Material Adverse
Effect;
(e) Except to the extent already obtained, as of the Initial Closing
Date no Governmental Action by any Governmental Authority or authorization,
registration, consent, approval, waiver, notice or other action by, to or
of any other Person is required to authorize or is required in connection
with (i) the execution, delivery or performance of any Operative Agreement
or (ii) the legality, validity, binding effect or enforceability of any
Operative Agreement, in each case, except those which have been obtained;
(f) [intentionally omitted]
(g) Since the date of the financial statements described in Section
6.1(i), there has been no event or occurrence which has had or is
reasonably likely to have a Material Adverse Effect.
(h) No litigation (including, without limitation, derivative
actions), arbitration proceeding or governmental proceeding is pending or,
to the knowledge of either the Construction Agent or the Lessee, threatened
against either of the Construction Agent or the Lessee or any of their
Subsidiaries which, is reasonably likely to result, either individually or
collectively, in a Material Adverse Effect. Other than any liability
incident to such litigation or proceedings, none of the Construction Agent,
the Lessee nor any of their Subsidiaries has any contingent liability not
provided for or disclosed in the financial statements referred to in
Section 7.3(f) which is reasonably likely to have a Material Adverse
Effect.
<PAGE>
(i) Neither the Construction Agent nor the Lessee knows of any
proposed material tax assessments against it which, is reasonably likely to
have a Material Adverse Effect;
(j) Neither the Construction Agent nor the Lessee has incurred any
material accumulated unfunded deficiency within the meaning of ERISA nor
has incurred any material liability to the PBGC established under ERISA (or
any successor thereto under ERISA) in connection with the employee benefit
plan established or maintained by the Construction Agent or the Lessee.
Each of the Construction Agent and the Lessee is in compliance in all
material respects with those provisions of ERISA and the regulations and
public interpretations thereunder which are applicable to the Construction
Agent or the Lessee. No Reportable Event has occurred with respect to any
Plan;
(k) Upon the execution and delivery of each Lease Supplement to the
Lease, (i) the Lessee will have unconditionally accepted the Property
subject to the Lease Supplement and will have a valid and subsisting
leasehold interest in the Property, subject only to the Permitted
Exceptions, and (ii) no offset will exist with respect to any Rent or other
sums payable under the Lease;
(l) Neither the Construction Agent nor the Lessee has filed a
voluntary petition in bankruptcy or been adjudicated a bankrupt or
insolvent, or filed any petition or answer seeking any reorganization,
liquidation, receivership, dissolution or similar relief under any
bankruptcy, receivership, insolvency, or other law relating to relief for
debtors, or sought or consented to or acquiesced in the appointment of any
trustee, receiver, conservator or liquidator of all or any part of its
properties or its interest in any Property. No court of competent
jurisdiction has entered an order, judgment, or decree approving a petition
filed against the Construction Agent or the Lessee seeking any
reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any federal or state bankruptcy,
receivership, insolvency or other law relating to relief for debtors, and
no other liquidator has been appointed for the Construction Agent or the
Lessee or all or any part of its properties or its interest in any
Property, and no such action is pending. Neither the Construction Agent
nor the Lessee has given notice to any Governmental Authority or any Person
of insolvency or pending insolvency, or suspension or pending suspension of
operations; and
(m) Except as otherwise contemplated by the Operative Agreements, the
Construction Agent shall not use the proceeds of any Holder Advance or Loan
for any purpose other than the purchase of Properties, the acquisition of
Equipment, and the construction of Improvements.
(n) [intentionally omitted]
(o) Neither the Construction Agent, the Lessee nor any of their
Subsidiaries is (a) an "investment company" or a company "controlled" by an
"investment company", within the meaning of the Investment Company Act or
(b) a "holding company", or a "subsidiary company" of a "holding company",
or an "affiliate" of a "holding company" or of a "subsidiary company" of a
"holding company", within the meaning of the Public Utility Holding Company
Act of 1935, as amended.
(p) Neither the Construction Agent, the Lessee nor any of their
Subsidiaries is engaged principally, or as one of its important activities,
in the business of extending credit for the purpose of purchasing or
carrying margin stock, and no proceeds of any Advance will be used for the
purpose, whether immediate, incidental or ultimate, of purchasing or
carrying any margin stock or maintaining or extending credit to others for
such purpose.
(q) Each of the Construction Agent, the Lessee and their Subsidiaries
has filed all material tax returns and reports required by Law to have been
filed by it and has paid all Taxes and governmental charges thereby shown
to be owing, except any such Taxes or charges which are either being
diligently contested in good faith by appropriate proceedings and for which
adequate reserves shall in accordance with GAAP have been set aside on its
books or where the failure to make such payment would not have a Material
Adverse Effect.
(r) To the best of the knowledge of each of the Construction Agent
and the Lessee, after inquiry it has deemed appropriate, each of the
Construction Agent, the Lessee and their Subsidiaries is in compliance with
all Environmental Laws and Occupational Safety and Health Laws where
failure to comply would reasonably be expected to have a Material Adverse
Effect. None of the Construction Agent, the Lessee nor any of their
Subsidiaries has received notice of any claims that any of them is not in
compliance in all material respects with any Environmental Law where
failure to comply could have a Material Adverse Effect.
(s) Each of the Construction Agent, the Lessee and their Subsidiaries
is in compliance with all statutes, judicial and administrative orders,
permits and governmental rules and regulations which are material to its
business or the non-compliance with which would be reasonably likely to
result in a Material Adverse Effect.
(t) All written information heretofore or contemporaneously herewith
furnished by either the Construction Agent or the Lessee or any of their
Subsidiaries to the Agent, the Owner Trustee, any Lender or any Holder for
purposes of or in connection with this Agreement and the transactions
contemplated hereby is, and all written information hereafter furnished by
or on behalf of the Construction Agent, the Lessee or any of their
Subsidiaries to the Agent, the Owner Trustee, any Lender or any Holder
pursuant hereto or in connection herewith will be, true and accurate in
every material respect on the date as of which such information is dated or
certified, and such information, taken as a whole, does not and will not
omit to state any material fact necessary to make such information, taken
as a whole, not misleading.
C. REPRESENTATIONS AND WARRANTIES OF THE AGENT. Effective as of the
Initial Closing Date, the Agent represents and warrants to each of the other
parties hereto that:
(a) It is a national banking association duly organized and validly
existing under the laws of the United States of America and has the full
power and authority to enter into and perform its obligations under this
Agreement and each other Operative Agreement to which it is or will be a
party;
(b) This Agreement and each other Operative Agreement to which it is
a party have been, or when executed and delivered will be, duly authorized
by all necessary corporate action on the part of the Agent and have been,
or on such Closing Date will have been, duly executed and delivered by the
Agent and, assuming the due authorization, execution and delivery hereof
and thereof by the other parties hereto and thereto, are, or upon execution
and delivery thereof will be, legal, valid and binding obligations of the
Agent, enforceable against it in accordance with their respective terms;
(c) The execution, delivery and performance by the Agent of this
Agreement and each other Operative Agreement to which it is or will be a
party are not, and will not be, inconsistent with the articles of
incorporation or by-laws or other charter documents of the Agent, do not
and will not contravene any applicable Law of the State of Texas or of the
United States of America governing its activities and will not contravene
any provision of, or constitute a default under any indenture, mortgage,
contract or other instrument of which it is a party or by which it or its
properties are bound, or require any consent or approval of any
Governmental Authority under any applicable law, rule or regulation of the
State of Texas or any federal law, rule or regulation of the United States
of America governing its activities; and
(d) Except as otherwise contemplated by the Operative Agreements, the
Agent shall not, nor shall it direct the Owner Trustee to, use the proceeds
of any Loan for any purpose other than the purchase of Properties, the
acquisition of Equipment, the construction of Improvements and the payment
of interest regarding the Loans which accrue under the Credit Agreement
during the period prior to the Basic Term Commencement Date with respect to
a particular Property.
SECTION 8. REPRESENTATIONS AND WARRANTIES ON FUNDING DATES.
A. REPRESENTATIONS AND WARRANTIES ON PROPERTY CLOSING DATES. The
Construction Agent, the Lessee and the Guarantor each hereby represent and
warrant as of each Property Closing Date as follows:
<PAGE>
1. The representations and warranties of the Construction Agent, the
Lessee and the Guarantor set forth in the Operative Agreements are true and
correct in all respects on and as of such Property Closing Date as if made
on and as of such date. The Construction Agent, the Lessee and the
Guarantor are in compliance with their respective obligations under the
Operative Agreements and there exists no Default or Event of Default under
any of the Operative Agreements which is continuing and which has not been
cured within any cure period expressly granted under the terms of the
applicable Operative Agreement. No Default or Event of Default will occur
under any of the Operative Agreements as a result of, or after giving
effect to, the Advance requested by the Requisition on such Property
Closing Date;
2. The Properties to be acquired are being acquired at a price that
is not in excess of fair market value and such Properties consist of
(i) unimproved Land, (ii) Land and existing Improvements thereon which will
be renovated and/or modified in accordance with the terms of this
Agreement, or (iii) Equipment. Each of the Properties is located at the
location set forth on the applicable Requisition, all of which are in one
of the Approved States;
3. Upon the acquisition of each Property on such Property Closing
Date, and at all times thereafter, the Lessor will have good and marketable
title to such Property, subject only to Permitted Liens;
4. The execution and delivery of each Operative Agreement delivered
by the Construction Agent and/or the Lessee on such Property Closing Date
and the performance of the obligations of the Construction Agent and the
Lessee under each Operative Agreement have been duly authorized by all
requisite corporate action of the Construction Agent or the Lessee, as
applicable;
5. Each Operative Agreement delivered on such Property Closing Date
by the Construction Agent and/or the Lessee has been duly executed and
delivered by the Construction Agent and/or the Lessee;
6. Each Operative Agreement delivered by the Construction Agent
and/or the Lessee on such Property Closing Date is a legal, valid and
binding obligation of the Construction Agent or the Lessee, as applicable,
enforceable against the Construction Agent or the Lessee, as applicable, in
accordance with its respective terms subject to applicable bankruptcy and
insolvency loans and principles of equity;
7. [intentionally omitted];
8. [intentionally omitted];
9. No portion of any Property being acquired by the Lessor on such
Property Closing Date is located in an area identified as a special flood
hazard area by the Federal Emergency Management Agency or other applicable
agency, or if any such Property is located in an area identified as a
special flood hazard area by the Federal Emergency Management Agency or
other applicable agency, then flood insurance has been obtained for such
Property in accordance with Section 14.2(b) of the Lease and in accordance
with the National Flood Insurance Act of 1968, as amended;
<PAGE>
10. The Construction Agent has obtained insurance coverage for each
Property being acquired by the Lessor on such Property Closing Date which
meet the requirements of Article XIV of the Lease and all of such coverage
is in full force and effect;
11. Each Property being acquired by the Lessor on such Property
Closing Date complies with all material Legal Requirements (including,
without limitation, all zoning and land use laws and Environmental Laws),
except to the extent that failure to comply therewith would not,
individually or in the aggregate, have a Material Adverse Effect;
12. [intentionally omitted];
13. All utility services and facilities necessary for the
construction of the Improvements existing on, or to be constructed after,
such Property Closing Date (including, without limitation, gas, electrical,
water and sewage services and facilities) are or will be available at the
boundaries of the real property upon which such Improvements exist or will
be constructed on each such Property; and
14. All conditions precedent contained in this Agreement and in the
other Operative Agreements relating to the acquisition of a Property by the
Lessor have been satisfied in full.
B. REPRESENTATIONS AND WARRANTIES UPON INITIAL CONSTRUCTION ADVANCES.
The Construction Agent, the Lessee and the Guarantor each hereby represent and
warrant as of each date on which an Initial Construction Advance is made as
follows:
1. The representations and warranties of the Construction Agent, the
Lessee and the Guarantor set forth in the Operative Agreements are true and
correct in all material respects on and as of the date of such Initial
Construction Advance as if made on and as of such date. The Construction
Agent, the Lessee and the Guarantor are in compliance with their respective
obligations under the Operative Agreements and there exists no Default or
Event of Default under any of the Operative Agreements. No Default or
Event of Default will occur under any of the Operative Agreements as a
result of, or after giving effect to, the Advance requested by the
Requisition on such date;
<PAGE>
2. The Lessor has good and marketable title to each Property,
subject only to Permitted Liens;
3. Upon filing in the filing offices designated by the Construction
Agent or the Lessee, the Lender Financing Statements, together with an
assignment of the filed Lender Financing Statements, will create a valid
and perfected first priority security interest in all the Properties and
other collateral described therein in which a security interest can be
perfected by filing under the UCC;
4. All consents, licenses, permits, authorizations, assignments and
building permits required by all Legal Requirements or pursuant to the
terms of any contract, indenture, instrument or agreement for construction,
completion, occupancy, operation, leasing or subleasing of each Property
with respect to which an Advance is being made have been obtained and are
in full force and effect, except to the extent that the failure to so
obtain would not, individually or in the aggregate, have a Material Adverse
Effect;
5. The Construction Agent has obtained insurance coverage covering
the Property which is the subject of such Advance which meets the
requirements of Article VI of the Agency Agreement before commencing
construction, repairs or modifications, as the case may be, and such
coverage is in full force and effect;
6. The Improvements which are the subject of the Advance, as
improved in accordance with the Plans and Specifications, will comply with
all Legal Requirements and Insurance Requirements (including, without
limitation, all zoning and land use laws and Environmental Laws), except to
the extent the failure to comply therewith would not, individually or in
the aggregate, have a Material Adverse Effect. The Plans and
Specifications have been or will be prepared in accordance with all
applicable Legal Requirements (including, without limitation, all
applicable Environmental Laws and building, planning, zoning and fire
codes), except to the extent the failure to comply therewith would not,
individually or in the aggregate, have a Material Adverse Effect, and upon
completion of such Improvements in accordance with the Plans and
Specifications, such Improvements will not encroach in any manner onto any
adjoining land (except as permitted by express written easements) and such
Improvements and the use thereof by the Lessee and its agents, assignees,
employees, invitees, lessees, licensees and tenants will comply in all
respects with all applicable Legal Requirements (including, without
limitation, all applicable Environmental Laws and building, planning,
zoning and fire codes), except to the extent the failure to comply
therewith would not, individually or in the aggregate, have a Material
Adverse Effect. Upon completion of such Improvements in accordance with
the Plans and Specifications, (i) there will be no material defects to such
Improvements including, without limitation, the plumbing, heating, air
conditioning and electrical systems thereof and (ii) all water, sewer,
electric, gas, telephone and drainage facilities and all other utilities
required to adequately service such Improvements for their intended use
will be available pursuant to adequate permits (including any that may be
required under applicable Environmental Laws), except to the extent that
failure to obtain any such permit would not, individually or in the
aggregate, have a Material Adverse Effect. There is no action, suit or
proceeding (including any proceeding in condemnation or eminent domain or
under any Environmental Law) pending or, to the best knowledge of the
Lessee, the Construction Agent or the Guarantor, threatened which adversely
affects the title to, or the use, operation or value of, such Properties.
No fire or other casualty with respect to such Properties has occurred
which fire or other casualty has had a Material Adverse Effect. All
utilities serving the related Properties, or proposed to serve the related
Properties in accordance with the Plans and Specifications, are located in,
and in the future will be located in, and vehicular access to such
Improvements is provided by, either public rights-of-way abutting the
related Property or Appurtenant Rights. All licenses, approvals,
authorizations, consents, permits (including, without limitation, building,
demolition and environmental permits, licenses, approvals, authorizations
and consents), easements and rights-of-way, including proof of dedication,
required for (i) the use, treatment, storage, transport, disposal or
disposition of any Hazardous Substance on, at, under or from the real
property underlying such Improvements during the construction of such
Improvements and the use and operation of such Improvements following such
construction, (ii) the construction of such Improvements in accordance with
the Plans and Specifications and the Agency Agreement and (iii) the use and
operation of such Improvements following such construction with the
applicable Equipment which such Improvements support for the purposes for
which they were intended have either been irrevocably obtained from the
appropriate Governmental Authorities having jurisdiction or from private
parties, as the case may be, or will be irrevocably obtained from the
appropriate Governmental Authorities having jurisdiction or from private
parties, as the case may be, prior to commencing any such construction or
use and operation, as applicable; and
<PAGE>
7. All conditions precedent contained in this Agreement and in the
other Operative Agreements relating to the initial Advance to the
Construction Agent of funds for the purpose of commencing construction,
repairs or modifications on any Property have been satisfied in full.
C. REPRESENTATIONS AND WARRANTIES UPON THE DATE OF EACH CONSTRUCTION
ADVANCE THAT IS NOT AN INITIAL ADVANCE. The Construction Agent, the Lessee and
the Guarantor each hereby represent and warrant as of each date on which a
Construction Advance is made, when such advance is not an Initial Construction
Advance, as follows:
8. The representations and warranties of the Construction Agent, the
Lessee and the Guarantor set forth in the Operative Agreements (including
the representations and warranties set forth in Section 8.2) are true and
correct in all material respects on and as of the date of such Construction
Advance as if made on and as of such date. The Construction Agent, the
Lessee and the Guarantor are in compliance with their respective
obligations under the Operative Agreements and there exists no Default or
Event of Default under any of the Operative Agreements which is continuing
and which has not been cured within any cure period expressly granted under
the terms of the applicable Operative Agreement. No Default or Event of
Default will occur under any of the Operative Agreements as a result of, or
after giving effect to, the Advance requested by the Requisition on such
date;
9. Construction of the Improvements to date has been performed in a
good and workmanlike manner, substantially in accordance with the Plans and
Specifications and in compliance with all Insurance Requirements and Legal
Requirements, except to the extent noncompliance with any Legal
Requirements would not, individually or in the aggregate, have a Material
Adverse Effect;
10. All consents, licenses, permits, authorizations, assignments and
building permits required by all Legal Requirements or pursuant to the
terms of any contract, indenture, instrument or agreement for construction,
completion, occupancy, operation, leasing or subleasing of each Property
have been obtained and are in full force and effect except to the extent
the failure to so obtain would not, individually or in the aggregate, have
a Material Adverse Effect;
11. When completed, the Improvements shall be wholly within any
building restriction lines (unless consented to by applicable Government
Authorities), however established; and
12. (i) Assuming that the applicable UCC Financing Statements have
been filed in the filing offices designated by the Lessee or the
Construction Agent, the Advance is secured by the Lien of the Security
Agreement, and (ii) there have been no Liens against the applicable
Improvements since the filing of the Lender Financing Statements other than
Permitted Liens.
SECTION 9. PAYMENT OF CERTAIN EXPENSES.
A. TRANSACTION EXPENSES. (a) Lessor agrees on the Initial Closing Date,
to pay, or cause to be paid, such Transaction Expenses (if any) as may be
designated by the Lessee to the Lessor; provided, however, the Lessor shall pay
such amounts described in this Section 9.1(a) only if (i) such amounts are
properly described in a Requisition delivered on or before the Initial Closing
Date, and (ii) funds are made available by the Lenders and the Holders in
connection with such Requisition in an amount sufficient to allow such payment.
On the Initial Closing Date after delivery and receipt of the Requisition
referenced in Section 4.2(a) hereof and satisfaction of the other conditions
precedent for such date, the Holders shall make Holder Advances and the Lenders
shall make Loans to the Lessor to pay for the Transaction Expenses referenced in
this Section 9.1(a). The Lessee and the Guarantor jointly and severally agree
to pay all amounts designated by the Lessee for payment by the Lessor in
accordance with the first sentence of this Section 9.1(a) to the extent such
amounts are not paid by Lessor.
(b) Lessor agrees on each Property Closing Date, on the date of any
Construction Advance and on the Completion Date to pay, or cause to be
paid, all reasonable fees, expenses and disbursements of the various legal
counsels for the Lessor and the Agent in connection with the transactions
contemplated by the Operative Agreements and incurred in connection with
such Property Closing Date, the date of such Advance, or such Completion
Date including all Transaction Expenses (arising from such Property Closing
Date, the date of such Advance or such Completion Date), all fees, expenses
and disbursements incurred with respect to the various items referenced in
Sections 5.3, 5.4, 5.5 and/or 5.6 (including without limitation any
premiums for title insurance policies and charges for any updates to such
policies) and all other reasonable fees, expenses and disbursements in
connection with such Property Closing Date, the date of such Advance or
such Completion Date including, without limitation, all expenses relating
to and all fees, taxes and expenses for the recording, registration and
filing of documents; provided, however, the Lessor shall pay such amounts
described in this Section 9.1(b) only if (i) such amounts are properly
described in a Requisition delivered on the applicable date and (ii) funds
are made available by the Lenders and the Holders in connection with such
Requisition in an amount sufficient to allow such payment. On each
Property Closing Date, on the date of any Construction Advance or any
Completion Date, after delivery of the applicable Requisition in
satisfaction of the other conditions precedent for such date, the Holders
shall make a Holder Advance and the Lenders shall make Loans to the Lessor
to pay for the Transaction Expenses, fees, expenses and other disbursements
referenced in this Section 9.1(b). The Lessee and the Guarantor jointly
and severally agree to pay all amounts referred to in this Section 9.1(b)
to the extent not paid by the Lessor.
<PAGE>
B. BROKERS' FEES AND STAMP TAXES. Lessee agrees to pay or cause to be
paid any brokers' fees and any and all stamp, transfer and other similar taxes,
fees and excises, if any, including any interest and penalties, which are
payable in connection with the transactions contemplated by this Agreement and
the other Operative Agreements and not paid by the Lessor in accordance with the
terms of Section 9.1(b).
C. CERTAIN FEES AND EXPENSES. Lessee and Guarantor jointly and severally
agree to pay or cause to be paid (i) the initial and annual Owner Trustee's fee
and all reasonable expenses of the Owner Trustee and any necessary co-trustees
(including without limitation reasonable counsel fees and expenses) or any
successor owner trustee, for acting as owner trustee under the Trust Agreement,
(ii) all reasonable costs and expenses incurred by the Construction Agent,
Lessee, the Agent, the Lenders, the Holders or the Lessor in entering into any
future amendments or supplements requested by Lessee with respect to any of the
Operative Agreements, whether or not such amendments or supplements are
ultimately entered into, or giving or withholding of waivers of consents hereto
or thereto, which have been requested by the Lessee and (iii) all reasonable
costs and expenses incurred by the Lessor, the Construction Agent, the Lessee,
the Holders, the Lenders or the Agent in connection with any exercise of
remedies under any Operative Agreement or any purchase of any Property by the
Lessee pursuant to Article XX of the Lease.
D. UNUSED FEE. The Lessee and the Guarantor jointly and severally agree
to pay to the Agent for the account of each Lender a commitment fee (the "Lender
Commitment Fee"), and to the Agent for the account of each Holder a commitment
fee (the "Holder Commitment Fee"), in each case during the Commitment Period,
computed at a rate per annum equal to the Commitment Fee Rate on the average
daily amount, with respect to the Lenders, of the Available Commitment of such
Lender and, with respect to the Holders, of the Available Holder Commitment of
such Holder during the period for which payment is made, payable quarterly in
arrears on each Commitment Fee Payment Date, commencing on the first such date
to occur after the Initial Closing Date. Lender Commitment Fees and Holder
Commitment Fees shall be calculated on the basis of a 365- (or 366-, as the case
may be) day year for the actual days elapsed. If all or a portion of any Lender
Commitment Fee or Holder Commitment Fee shall not be paid when due, such overdue
amount shall bear interest, payable by the Lessee and the Guarantor on demand,
at a rate per annum equal to the rate described in Section 2.7(b) of the Credit
Agreement plus 2%, from the date of such non-payment until such amount is paid
in full (as well after as before judgment).
SECTION 10. OTHER COVENANTS AND AGREEMENTS.
A. COOPERATION WITH THE CONSTRUCTION AGENT OR THE LESSEE. The Holders,
the Owner Trustee (at the direction of the Holders) and the Agent shall, to the
extent reasonably requested by the Construction Agent or Lessee (but without
assuming additional liabilities on account thereof), at the Construction Agent's
or the Lessee's expense cooperate with the Construction Agent or the Lessee in
connection with its covenants contained herein including, without limitation, at
any time and from time to time, upon the request of the Construction Agent or
the Lessee to promptly and duly execute and deliver any and all such further
instruments, documents and financing statements (and continuation statements
related thereto) as the Construction Agent or the Lessee may reasonably request
in order to perform such covenants.
<PAGE>
B. COVENANTS OF THE OWNER TRUSTEE AND THE HOLDERS. Each of the Owner
Trustee and the Holders hereby agree that so long as this Agreement is in
effect:
(a) Each of the Holders and the Owner Trustee (both in its trust
capacity and in its individual capacity) will not create or permit to exist
at any time, and will, at its own cost and expense, promptly take such
action as may be necessary duly to discharge, or to cause to be discharged,
all Lessor Liens on the Properties attributable to it; provided, however,
that the Holders and the Owner Trustee shall not be required to so
discharge any such Lessor Lien while the same is being contested in good
faith by appropriate proceedings diligently prosecuted so long as such
proceedings shall not involve any material danger of impairment of the
Liens of the Security Documents or of the sale, forfeiture or loss of, and
shall not interfere with the use or disposition of, any Property or title
thereto or any interest therein or the payment of Rent;
(b) Without prejudice to any right under the Trust Agreement of the
Owner Trustee to resign (subject to requirement set forth in the Trust
Agreement that such resignation shall not be effective until a successor
shall have agreed to accept such appointment), or the Holders' rights under
the Trust Agreement to remove the institution acting as Owner Trustee
(after consent to such removal by the Agent as provided in the Trust
Agreement), each of the Holders and the Owner Trustee hereby agrees with
the Lessee and the Agent (i) not to terminate or revoke the trust created
by the Trust Agreement except as permitted by Article VIII of the Trust
Agreement, (ii) not to amend, supplement, terminate or revoke or otherwise
modify any provision of the Trust Agreement in such a manner as to
adversely affect the rights of any such party without the prior written
consent of such party and (iii) to comply with all of the terms of the
Trust Agreement, the nonperformance of which would adversely affect such
party;
(c) (i) The Owner Trustee or any successor may resign or be removed
by the Holders as Owner Trustee, a successor Owner Trustee may be appointed
and a corporation may become the Owner Trustee under the Trust Agreement,
only in accordance with the provisions of Article IX of the Trust Agreement
and, with respect to such appointment, with the consent of the Lessee,
which consent shall not be unreasonably withheld or delayed; and (ii) At
the direction of the Lessee the Owner Trustee will be removed by the
Holders and a successor appointed in accordance with the provisions of
Article IX of the Trust Agreement, provided that (A) such successor meets
the requirements of Section 9.1(c) of the Trust Agreement, and (B) such
successor is approved in writing by the Agent and the Holders, which
approval shall not be unreasonably withheld or delayed;
(d) The Owner Trustee, in its capacity as Owner Trustee under the
Trust Agreement, and not in its individual capacity, shall not contract
for, create, incur or assume any indebtedness, or enter into any business
or other activity, other than pursuant to or under the Operative
Agreements;
(e) The Holders will not instruct the Owner Trustee to take any
action in violation of the terms of any Operative Agreement;
<PAGE>
(f) Neither any Holder nor the Owner Trustee shall (i) commence any
case, proceeding or other action with respect to the Owner Trustee under
any existing or future law of any jurisdiction, domestic or foreign,
relating to bankruptcy, insolvency, reorganization, arrangement, winding-
up, liquidation, dissolution, composition or other relief with respect to
it or its debts, or (ii) seek appointment of a receiver, trustee, custodian
or other similar official with respect to the Owner Trustee or for all or
any substantial benefit of the creditors of the Owner Trustee; and neither
any Holder nor the Owner Trustee shall take any action in furtherance of,
or indicating its consent to, approval of, or acquiescence in, any of the
acts set forth in this paragraph;
(g) The Owner Trustee shall give prompt notice to the Lessee and the
Agent if the Owner Trustee's chief place of business or chief executive
office, or the office where the records concerning the accounts or contract
rights relating to a Property are kept, shall cease to be located at 79
South Main Street, Salt Lake City, Utah 84111, or if it shall change its
name;
(h) Provided that no Lease Default or Lease Event of Default has
occurred and is continuing, neither the Owner Trustee nor any Holder shall,
without the prior written consent of the Lessee, consent to or permit any
amendment, supplement or other modification of the terms and provisions of
the Credit Agreement or the Notes;
(i) Neither the Owner Trustee nor any Holder shall consent to or
permit any amendment, supplement or other modification of the terms and
provisions of any Operative Agreement, in each case without the prior
written consent of the Agent except as described in Section 10.5 of this
Agreement;
(j) The Owner Trustee (i) shall take such actions and shall refrain
from taking such actions with respect to the Operative Agreements and/or
relating to the Properties and shall grant such approvals and otherwise act
or refrain from acting with respect to the Operative Agreements and/or
relating to the Properties in each case as directed in writing by the
Agent, notwithstanding any contrary instruction or absence of instruction
by any Holder or Holders; and (ii) shall not take any action, grant any
approvals or otherwise act under or with respect to the Operative
Agreements and/or any matters relating to the Properties without first
obtaining the prior written consent of the Agent (and without regard to any
contrary instruction or absence of instruction by any Holder);
(k) The Owner Trustee shall provide to the Lessee on a quarterly
basis copies of the books and records of the Owner Trustee relating to the
Trust Estate;
(l) The Owner Trustee may, by written request to the Holders given
not later than 120 days and not more than 180 days prior to the Maturity
Date, make a request (an "EXTENSION REQUEST") that the Maturity Date be
extended from the then applicable Maturity Date (the "Existing Maturity
Date") to a date that is one year after the Existing Maturity Date (the
"EXTENDED MATURITY DATE"); provided, however, in no event shall the
Maturity Date be extended beyond May 25, 2005. No later than the date (the
"EXTENSION RESPONSE DATE") which is 30 days after such request has been
delivered to each of the Holders, each Holder will notify the Owner Trustee
in writing (with a copy to the Administrative Agent) whether or not it
consents to such Extension Request (which consent may be granted or denied
by each Holder in its sole discretion and may be conditioned on receipt of
such financial information or other documentation as may be specified by
such Lender), PROVIDED, that any Holder that fails to so advise the Owner
Trustee on or prior to the Extension Response Date shall be deemed to have
denied such Extension Request. The extension of the Existing Maturity Date
contemplated by an Extension Request shall become effective as of the
Existing Maturity Date (the "EXTENSION EFFECTIVE DATE") if, but only if,
each of the following conditions is satisfied: (i) all of the Lenders
(other than the Non-Consenting Lenders which have been replaced by
Replacement Lenders in accordance with Section 2.5(d) of the Credit
Agreement) shall have consented to such Extension Request and all of the
Holders (other than non-consenting Holders which have been replaced in
accordance with Section 10.2(m) hereof) shall have confirmed in writing to
the Owner Trustee and the Administrative Agent that they have consented to
such Extension Request; (ii) (x) each of the representations and warranties
made by the Owner Trustee in or pursuant to the Credit Documents shall be
true and correct in all material respects on and as of each of the date of
such Extension Request and such Extension Effective Date as if made on and
as of such date, except to the extent relating to an earlier date (y) no
Default or Event of Default shall have occurred and be continuing on the
date of such Extension Request or on such Extension Effective Date and
(z) on each of the date of such Extension Request and such Extension
Effective Date the Holders and the Administrative Agent shall have received
a certificate of the Owner Trustee as to the matters set forth in clauses
(x) and (y) above and (iii) the Administrative Agent and the Holders shall
have received satisfactory evidence that the Expiration Date with respect
to each Property under the Lease shall have been extended to the Extended
Maturity Date; and
<PAGE>
(m) The Lessee shall be permitted to replace any Holder failing or
refusing to give a consent requested under Section 10.2(e) hereof with a
replacement bank or other financial institution (a "REPLACEMENT HOLDER") at
any time on or prior to the Extension Effective Date; provided, that
(i) such replacement does not conflict with any Requirement of Law,
(ii) the Replacement Holder shall purchase, at par, the Certificate of such
Holder and other amounts owing to such non-consenting Holder on or prior to
the date of replacement (which other amounts shall include any Loans
outstanding if such Holder (or an Affiliate of such Holder) is also a
Lender), and (iii) the Replacement Holder shall have agreed to be subject
to all of the terms and conditions of the Agreement (including the
extension of the Maturity Date contemplated by the Extension Request) and
the other Operative Agreements to which the Holders are a party.
B. LESSEE AND GUARANTOR COVENANTS, CONSENT AND ACKNOWLEDGMENT.
(a) Lessee and Guarantor hereby each acknowledge and agree that the
Owner Trustee, pursuant to the terms and conditions of the Security
Agreement and the Mortgage Instruments, shall create Liens respecting the
various properties described therein in favor of the Agent (which property
includes specifically without limitation all rights and claims of the Owner
Trustee under the Guaranty Agreement). Lessee and Guarantor hereby each
irrevocably consent to the creation, perfection and maintenance of such
Liens and acknowledge and agree that the Agent may hereafter exercise any
or all rights of the Owner Trustee with respect to the property on which
such Liens are granted.
(b) Lessor hereby instructs Lessee, and Lessee hereby acknowledges
and agrees, that until such time as the Loans are paid in full and the
Liens evidenced by the Security Agreement and the Mortgage Instruments have
been released (i) any and all Rent and any and all other amounts of any
kind or type under any of the Operative Agreements due and owing or payable
to the Lessor or the Owner Trustee shall instead be paid directly to the
Agent or as the Agent may direct from time to time and (ii) Lessee shall
cause all notices, certificates, communications and other information which
is delivered, or is required to be delivered, to the Lessor, the Owner
Trustee or any Holder also to be delivered at the same time to the Agent.
(c) Lessee shall not consent to or permit any amendment, supplement
or other modification of the terms or provisions of any Operative Agreement
without, in each case, obtaining the prior written consent of the Agent.
C. SHARING OF CERTAIN PAYMENTS. The parties hereto acknowledge and agree
that all payments due and owing by the Lessee to the Lessor under the Lease or
any of the other Operative Agreements shall be made by the Lessee directly to
the Agent as more particularly provided in Section 10.3 hereof. The Holders and
the Agent, on behalf of the Lenders, acknowledge the terms of Section 8 of the
Credit Agreement regarding the allocation of payments and other amounts made or
received from time to time under the Operative Agreements and agree all such
payments and amounts are to be allocated as provided in Section 8 of the Credit
Agreement. In connection therewith the Holders hereby (a) appoint the Agent to
act as collateral agent for the Holders in connection with the Lien granted by
the Mortgage Instruments to secure the Holder Amount and (b) acknowledge and
agree and direct that the rights and remedies of the beneficiaries of the Lien
of the Mortgage Instruments shall be exercised by the Agent on behalf of the
Lenders and the Holders as directed from time to time by the Lenders without
notice to or consent from the Holders.
<PAGE>
D. GRANT OF EASEMENTS, ETC. 1. The Agent and the Holders hereby agree
that, so long as no Event of Default shall have occurred and be continuing, and
until such time as the Agent gives instructions to the contrary to the Owner
Trustee, the Owner Trustee shall, from time to time at the request of the
Lessee, in connection with the transactions contemplated by the Agency
Agreement, the Lease or the other Operative Agreements, (i) grant easements and
other rights in the nature of easements with respect to any Property, (ii)
release existing easements or other rights in the nature of easements which are
for the benefit of any Property, and (iii) execute and deliver to any Person any
instrument appropriate to confirm or effect such grants or releases.
2. To the extent requested by the Lessee with respect to any
individual Property, the Owner Trustee hereby agrees to provide the Lessee
with a limited power of attorney in the form attached hereto as EXHIBIT I
referring to such Property and permitting the Lessee to act on behalf of
Lessor in connection with the matters described in such limited power of
attorney; PROVIDED, the limited power of attorney may be utilized only to
the extent (x) no Default or Event of Default shall have occurred or be
continuing at the time of the contemplated exercise of the Limited Power of
Attorney and (y) the agreements executed by the Lessee pursuant to such
limited power of attorney shall be executed in the normal course of the
Lessee's business, at market rates, on commercially reasonable terms and
accomplished in a manner so as not to diminish the value of any Property in
any material respect. Lessee shall provide to the Agent promptly after
execution such documents and other instruments executed in connection with
the limited power of attorney granted hereby. The Agent, the Holder, the
Lenders, the Construction Agent, the Lessor and the Lessee acknowledge and
agree to the foregoing. To the extent any Event of Default has occurred
and is continuing or the Lessee has received written notice of the
occurrence of any Default, the limited power of attorney shall immediately
terminate and be of no further force or effect unless reinstated in writing
by the Owner Trustee and acknowledged and agreed to by the Holder and the
Agent. Each action taken by the Lessee under the limited power of attorney
shall automatically be deemed to be a representation and warranty as of
such date that the conditions set forth in the first sentence of this
Section 10.5(b) are satisfied in full as of such date.
E. CONSTRUCTION PERIOD TERMINATION DATE. The Lessee shall have the right
to request that the Owner Trustee and the Agent extend the Construction Period
Termination Date from May 25, 1997 to November 25, 1997 upon delivery of a
written request for such extension to the Owner Trustee and the Agent at least
ninety (90) and not more than one hundred and eighty (180) days prior to May 25,
1997. The Owner Trustee and the Agent (provided that the Agent has no actual
knowledge of the existence of an Event of Default) shall not unreasonably deny
such request. The Construction Agent agrees that it will not commence new
construction with respect to a Property within one hundred and twenty (120) days
prior to the Construction Period Termination Date.
<PAGE>
SECTION 11 CREDIT AGREEMENT AND TRUST AGREEMENT.
A. CONSTRUCTION AGENT'S AND LESSEE'S CREDIT AGREEMENT RIGHTS.
Notwithstanding anything to the contrary contained in the Credit Agreement, the
Agent, the Construction Agent, the Lessee and the Owner Trustee hereby agree
that, prior to the occurrence and continuation of any Credit Agreement Default,
the Construction Agent and the Lessee (as designated below) shall have the
following rights:
1. the Construction Agent shall have the right and obligation (as
more specifically provided in Section 5.7 hereof) to designate the portion
of the Loans on which interest is due and payable for purposes of the
definition of "Allocated Interest" in Section 1.1 of the Credit Agreement;
2. the Construction Agent shall have the right to give the notice
referred to in Section 2.3 of the Credit Agreement, to designate the
account to which a borrowing under the Credit Agreement is to be credited
pursuant to Section 2.3 of the Credit Agreement and to provide the
Allocation Notice;
3. the Lessee shall have the right to terminate or reduce the
Commitments pursuant to Section 2.5(a) of the Credit Agreement, to make an
Extension Request pursuant to Section 2.5(c) of the Credit Agreement and to
replace any Non-Consenting Lender pursuant to Section 2.5(d) of the Credit
Agreement;
4. the Lessee shall have the right to replace any Lender pursuant to
Section 2.13(b) of the Credit Agreement;
5. the Lessee shall have the right to cure Credit Agreement Events
of Default to the extent not created by any act or omission of the Lessee,
the Construction Agent or the Guarantor or any Subsidiary or affiliate
thereof;
6. the Lessee shall have the right to approve or disapprove any
successor agent pursuant to Section 7.9 of the Credit Agreement;
7. the Lessee shall have the right to consent (or to withhold
consent) to any assignment by a Lender to which the Lessee has the right to
consent pursuant to Section 9.8 of the Credit Agreement; and
8. without limiting the foregoing clauses (a) through (g), and in
addition thereto, the Lessee shall have the right to exercise any other
right of the Owner Trustee under the Credit Agreement upon not less than
five (5) Business Days' prior written notice from the Lessee to the Owner
Trustee, unless the Owner Trustee objects to such exercise within five (5)
Business Days of receipt of such notice.
B. CONSTRUCTION AGENT'S AND LESSEE'S TRUST AGREEMENT RIGHTS.
Notwithstanding anything to the contrary contained in the Trust Agreement, the
Construction Agent, the Lessee, the Owner Trustee and the Holders hereby agree
that, prior to the occurrence and continuation of any Lease Default or Lease
Event of Default, the Construction Agent and the Lessee (as designated below)
shall have the following rights:
1. the Construction Agent shall have the right and the obligation
(as more specifically provided in Section 5.7 hereof) to designate the
portion of the Holder Advances on which Holder Yield is due and payable for
purposes of the definition of Allocated Return in Section 3.1(c) of the
Trust Agreement;
2. the Lessee shall have the right to request that another funding
office be designated pursuant to Section 3.10(b) of the Trust Agreement;
3. no removal of the Owner Trustee and appointment of a successor
Owner Trustee pursuant to Section 9.1 of the Trust Agreement shall be made
without the prior written consent (not to be unreasonably withheld or
delayed) of the Lessee; and
<PAGE>
4. the Holders and the Owner Trustee shall not amend, supplement or
otherwise modify any provision of the Trust Agreement in such a manner as
to adversely affect the rights of the Lessee without the prior written
consent (not to be unreasonably withheld or delayed) of the Lessee.
SECTION 12 TRANSFER OF INTEREST.
A. RESTRICTIONS ON TRANSFER. Any Lender may assign or transfer all or a
portion of its interest hereunder and under the other Operative Agreements in
accordance with the terms of Section 9.8 of the Credit Agreement. The Holders
may, directly or indirectly, assign, convey or otherwise transfer any of their
right, title or interest in or to the Trust Estate or the Trust Agreement with
the consent of the Agent and the Lessee, which consent shall not be unreasonably
withheld or delayed and, as more specifically provided in the Trust Agreement,
with the consent of the other Holders; provided, however, (i) subject to the
following subparagraph (ii), the Lessee may withhold its consent in its sole
discretion with respect to any proposed assignment, transfer or other conveyance
to any Person that is deemed by the Lessee to be a competitor of the Guarantor
(or any of its affiliates) or to be an affiliate of such a competitor, and (ii)
notwithstanding the foregoing provisions of this sentence, the consent of the
Lessee to such assignment, transfer or other conveyance shall not be required
during the existence and continuance of any Event of Default. The Owner Trustee
may, subject to the Lien of the applicable Security Documents but only with the
prior written consent of the Agent and the Holders (which consent may be
withheld by the Agent and/or the Holders in their sole discretion), directly or
indirectly, assign, convey, appoint an agent with respect to enforcement of, or
otherwise transfer any of its right, title or interest in or to any Property,
the Lease, the Trust Agreement, this Agreement (including, without limitation,
any right to indemnification thereunder), or any other document relating to a
Property or any interest in a Property as provided in the Trust Agreement and
the Lease.
B. EFFECT OF TRANSFER. From and after any transfer effected in
accordance with this Section 12, the transferor shall be released, to the extent
of such transfer, from its liability hereunder and under the other documents to
which it is a party in respect of obligations to be performed on or after the
date of such transfer. Upon any transfer by the Owner Trustee or a Holder or a
Lender as above provided, any such transferee shall assume the obligations of
the Owner Trustee and the Lessor or Holder or Lender, as the case may be, and
shall be deemed an "Owner Trustee", "Lessor", "Holder", or "Lender" as the case
may be, for all purposes of such documents and each reference herein to the
transferor shall thereafter be deemed a reference to such transferee for all
purposes, except as provided in the preceding sentence. Notwithstanding any
transfer of all or a portion of the transferor's interest as provided in this
Section 12, the transferor shall be entitled to all benefits accrued and all
rights vested prior to such transfer including, without limitation, rights to
indemnification under any such document.
SECTION 13 INDEMNIFICATION.
A. GENERAL INDEMNITY. Whether or not any of the transactions contemplated
hereby shall be consummated, the Indemnity Provider hereby assumes liability for
and agrees to defend, indemnify and hold harmless each Indemnified Person on an
After Tax Basis from and against any Claims, which may be imposed on, incurred
by or asserted against an Indemnified Person (other than to the extent such
Claims arise from the gross negligence, willful misconduct or willful breach of
such Indemnified Person) in any way relating to or arising or alleged to arise
out of the execution, delivery, performance or enforcement of this Agreement,
the Lease or any other Operative Agreement or on or with respect to any Property
or any component thereof, including, without limitation, Claims in any way
relating to or arising or alleged to arise out of (a) the financing,
refinancing, purchase, acceptance, rejection, ownership, design, construction,
development, delivery, acceptance, nondelivery, leasing, subleasing, possession,
use, operation, repair, modification, transportation, condition, sale, return,
repossession (whether by summary proceedings or otherwise), or any other
disposition of a Property or any part thereof, including the acquisition,
holding or disposition of any interest in any Property, lease or agreement
comprising a portion of any thereof; (b) any latent or other defects in any
property whether or not discoverable by an Indemnified Person or the Indemnity
Provider; (c) a violation of Environmental Laws, Environmental Claims or other
loss of or damage to any property or the environment relating to any Property,
the Lease, the Agency Agreement or the Indemnity Provider; (d) the Operative
Agreements, or any transaction contemplated thereby; (e) any breach by the
Indemnity Provider of any of its representations or warranties under the
Operative Agreements to which the Indemnity Provider is a party or failure by
the Indemnity Provider to perform or observe any covenant or agreement to be
performed by it under any of the Operative Agreement; (f) the transactions
contemplated hereby or by any other Operative Agreement, in respect of the
application of Parts 4 and 5 of Subtitle B of Title I of ERISA; and (g) personal
injury, death or property damage, including Claims based on strict or absolute
liability in tort.
<PAGE>
If a written Claim is made against any Indemnified Person or if any
proceeding shall be commenced against such Indemnified Person (including a
written notice of such proceeding), for any Claim, such Indemnified Person shall
promptly notify the Indemnity Provider in writing and shall not take action with
respect to such Claim without the consent of the Indemnity Provider for thirty
(30) days after the receipt of such notice by the Indemnity Provider; provided,
however, that, in the case of any such Claim, if action shall be required by law
or regulation to be taken prior to the end of such 30-day period, such
Indemnified Person shall, in such notice to the Indemnity Provider, inform the
Indemnity Provider of such shorter period, and no action shall be taken with
respect to such Claim without the consent of the Indemnity Provider before 7
days before the end of such shorter period; provided, further, that the failure
of such Indemnified Person to give the notices referred to in this sentence
shall not diminish the Indemnity Provider's obligation hereunder except to the
extent such failure materially precludes the Indemnity Provider from contesting
such Claim.
If, within thirty (30) days of receipt of such notice from the Indemnified
Person (or such shorter period as the Indemnified Person has notified the
Indemnity Provider is required by law or regulation for the Indemnified Person
to respond to such Claim), the Indemnity Provider shall request in writing that
such Indemnified Person respond to such Claim, the Indemnified Person shall, at
the expense of the Indemnity Provider, in good faith conduct and control such
action (including, without limitation, by pursuit of appeals) (provided,
however, that (A) if such Claim can be pursued by the Indemnity Provider on
behalf of such Indemnified Person, the Indemnified Person, at the Indemnity
Provider's request, shall allow the Indemnity Provider to conduct and control
the response to such Claim and (B) in the case of any Claim, the Indemnified
Person may request the Indemnity Provider to conduct and control the response to
such Claim (with counsel to be selected by the Indemnity Provider and consented
to by such Indemnified Person, such consent not to be unreasonably withheld;
provided, however, that (i) any Indemnified Person may retain separate counsel
at the expense of the Indemnity Provider in the event of a conflict that could
have a materially adverse effect on the Indemnified Person and (ii) any such
separate counsel shall be directed by the Indemnified Person to cooperate in
good faith with the Indemnity Provider and its counsel)) by, in the sole
discretion of the Person conducting and controlling the response to such Claim
(1) resisting payment thereof, (2) not paying the same except under protest, if
protest is necessary and proper, (3) if the payment be made, using reasonable
efforts to obtain a refund thereof in appropriate administrative and judicial
proceedings, or (4) taking such other action as is reasonably requested by the
Indemnity Provider from time to time.
The party controlling the response to any Claim shall consult in good faith
with the non-controlling party and shall keep the non-controlling party
reasonably informed as to the conduct of the response to such Claim; provided,
that all decisions ultimately shall be made in the discretion of the controlling
party. The parties agree that an Indemnified Person may at any time decline to
take further action with respect to the response to such Claim and may settle
such Claim if such settlement would not have a materially adverse effect on the
Lessee or the Guarantor and if such Indemnified Person shall waive its rights to
any indemnity from the Indemnity Provider that otherwise would be payable in
respect of such Claim (and any future Claim, the pursuit of which is precluded
by reason of such resolution of such Claim) and shall pay to the Indemnity
Provider any amount previously paid or advanced by the Indemnity Provider
pursuant to this Section 13.1 by way of indemnification or advance for the
payment of an amount regarding such Claim.
<PAGE>
Notwithstanding the foregoing provisions of this Section 13.1, an
Indemnified Person shall not be required to take any action and no Indemnity
Provider shall be permitted to respond to any Claim in its own name or that of
the Indemnified Person unless (A) the Indemnity Provider shall have agreed to
pay and shall pay to such Indemnified Person on demand and on an After Tax Basis
all reasonable costs, losses and expenses that such Indemnified Person actually
incurs in connection with such Claim, including, without limitation, all
reasonable legal, accounting and investigatory fees and disbursements, (B) in
the case of a Claim that must be pursued in the name of an Indemnified Person
(or an Affiliate thereof), the amount of the potential indemnity (taking into
account all similar or logically related Claims that have been or could be
raised for which the Indemnity Provider may be liable to pay an indemnity under
this Section 13.1) exceeds $75,000, (C) the Indemnified Person shall have
reasonably determined that the action to be taken will not result in any
material danger of sale, forfeiture or loss of any Property, or any part thereof
or interest therein, will not interfere with the payment of Rent, and will not
result in risk of criminal liability, (D) if such Claim shall involve the
payment of any amount prior to the resolution of such Claim, the Indemnity
Provider shall provide to the Indemnified Person an interest-free advance in an
amount equal to the amount that the Indemnified Person is required to pay (with
no additional net after-tax cost to such Indemnified Person), and (E) no Event
of Default shall have occurred and be continuing. In addition, an Indemnified
Person shall not be required to contest any Claim in its name (or that of an
Affiliate) if the subject matter thereof shall be of a continuing nature and
shall have previously been decided adversely by a court of competent
jurisdiction pursuant to the contest provisions of this Section 13.1, unless
there shall have been a change in law (or interpretation thereof) and the
Indemnified Person shall have received, at the Indemnity Provider's expense, an
opinion of independent counsel selected by the Indemnified Person and reasonably
acceptable to the Indemnity Provider stating that as a result of such change in
law (or interpretation thereof), it is more likely than not that the Indemnified
Person will prevail in such contest.
B. GENERAL TAX INDEMNITY. (a) The Indemnity Provider shall pay and
assume liability for, and does hereby agree to indemnify, protect and defend
each Property and all Indemnified Persons, and hold them harmless against, all
Impositions on an After Tax Basis, and all payments pursuant to the Operative
Agreements shall be made free and clear of and without deduction for any and all
present and future Impositions.
(b) Notwithstanding anything to the contrary in Section 13.2(a)
hereof, franchise taxes or taxes imposed on the overall gross or net income
of an Indemnified Person (other than taxes in the nature of sales, use,
rental, transfer, property or similarly-based taxes) shall be excluded from
the indemnity required by Section 13.2(a); PROVIDED, HOWEVER, that the
provisions of this Section 13.2(b) shall not exclude from the indemnity
described in Section 13.2(a) hereof (i) income taxes imposed on the Lessor
to the extent that such taxes do not relieve an Indemnified Person other
than Lessor from income taxes that would not have been subject to
indemnification under Section 13.2(a), and (ii) franchise or income taxes
to the extent that such taxes are imposed on an Indemnified Person by any
state or local jurisdiction in which the Indemnified Person would not be
subject to such taxes but for the location, possession or use of any
Property in such jurisdiction (it being understood that any such indemnity
would be payable only to the extent of the net harm incurred by such
Indemnified Person from such taxes, taking into account any incremental tax
benefit in another tax jurisdiction resulting from payment of such taxes).
(c) (i) Subject to the terms of Section 13.2(f), the Indemnity
Provider shall pay or cause to be paid all Impositions directly to the
taxing authorities where feasible and otherwise to the Indemnified Person,
as appropriate, and the Indemnity Provider shall at its own expense, upon
such Indemnified Person's reasonable request, furnish to such Indemnified
Person copies of official receipts or other satisfactory proof evidencing
such payment.
(ii) In the case of Impositions for which no contest is conducted
pursuant to Section 13.2(f) and which the Indemnity Provider pays
directly to the taxing authorities, the Indemnity Provider shall pay
such Impositions prior to the latest time permitted by the relevant
taxing authority for timely payment. In the case of Impositions for
which the Indemnity Provider reimburses an Indemnified Person, the
Indemnity Provider shall do so within thirty (30) days after receipt
by the Indemnity Provider of demand by such Indemnified Person
describing in reasonable detail the nature of the Imposition and the
basis for the demand (including the computation of the amount
payable). In the case of Impositions for which a contest is conducted
pursuant to Section 13.2(f), the Indemnity Provider shall pay such
Impositions or reimburse such Indemnified Person for such Impositions,
to the extent not previously paid or reimbursed pursuant to subsection
(a), prior to the latest time permitted by the relevant taxing
authority for timely payment after conclusion of all contests under
Section 13.2(f).
(d) The Indemnity Provider shall be responsible for preparing and
filing any real and personal property or ad valorem tax returns in respect
of each Property. In case any other report or tax return shall be required
to be made with respect to any obligations of the Indemnity Provider under
or arising out of subsection (a) and of which the Indemnity Provider has
knowledge, the Indemnity Provider, at its sole cost and expense, shall
notify the relevant Indemnified Person of such requirement and (except if
such Indemnified Person notifies the Indemnity Provider that such
Indemnified Person intends to file such report or return) (A) to the extent
required or permitted by and consistent with Legal Requirements, make and
file in Indemnity Provider's name such return, statement or report; and (B)
in the case of any other such return, statement or report required to be
made in the name of such Indemnified Person, advise such Indemnified Person
of such fact and prepare such return, statement or report for filing by
such Indemnified Person or, where such return, statement or report shall be
required to reflect items in addition to any obligations of the Indemnity
Provider under or arising out of subsection (a), provide such Indemnified
Person at the Indemnity Provider's expense with information sufficient to
permit such return, statement or report to be properly made with respect to
any obligations of the Indemnity Provider under or arising out of
subsection (a). Such Indemnified Person shall, upon the Indemnity
Provider's request, provide any data maintained by such Indemnified Person
(and not otherwise available to or within the control of the Indemnity
Provider) with respect to each Property which the Indemnity Provider may
reasonably require to prepare any required tax returns or reports, and the
Indemnity Provider shall reimburse the Indemnified Person for any third
party and out-of-pocket costs that the Indemnified Person may incur in
providing such information. Notwithstanding anything to the contrary in
this subsection (d), the Indemnity Provider shall not be required to
prepare any income or franchise tax returns for any Indemnified Person.
<PAGE>
(e) If an Indemnified Person does not notify the Indemnity Provider
in writing within thirty (30) days after its receipt of a written Claim for
any Imposition against such Indemnified Person (or within such shorter
period of time as may be necessary to notify the Indemnity Provider at
least seven (7) days prior to the time that action is required by law or
regulation to be taken with respect to such Claim, but in no event less
than ten (10) days after the Indemnified Person's receipt of such Claim),
then the Indemnity Provider shall have no obligation under Section 13.2(a)
to indemnify such Indemnified Person for any interest, penalties or
additions to tax attributable to the period during which notice is not
provided as required by this subsection (e).
(f) (i) If a written Claim is made against any Indemnified Person or
if any proceeding shall be commenced against such Indemnified Person
(including a written notice of such proceeding), for any Impositions, such
Indemnified Person shall promptly notify the Indemnity Provider in writing
and shall not take action with respect to such Claim or proceeding without
the consent of the Indemnity Provider for thirty (30) days after the
receipt of such notice by the Indemnity Provider; provided, however, that,
in the case of any such Claim or proceeding, if action shall be required by
law or regulation to be taken prior to the end of such 30-day period, such
Indemnified Person shall, in such notice to the Indemnity Provider, inform
the Indemnity Provider of such shorter period, and no action shall be taken
with respect to such Claim or proceeding without the consent of the
Indemnity Provider before 7 days before the end of such shorter period;
provided, further, that the failure of such Indemnified Person to give the
notices referred to this sentence shall not diminish the Indemnity
Provider's obligation hereunder except to the extent such failure
materially precludes the Indemnity Provider from contesting such Claim.
(ii) If, within thirty (30) days of receipt of such notice
from the Indemnified Person (or such shorter period as the Indemnified
Person has notified the Indemnity Provider is required by law or
regulation for the Indemnified Person to commence such contest), the
Indemnity Provider shall request in writing that such Indemnified
Person contest such Imposition, the Indemnified Person shall, at the
expense of the Indemnity Provider, in good faith conduct and control
such contest (including, without limitation, by pursuit of appeals)
relating to the validity, applicability or amount of such Impositions
(provided, however, that (A) if such contest involves a tax other than
a tax on net income and can be pursued independently from any other
proceeding involving a tax liability of such Indemnified Person, the
Indemnified Person, at the Indemnity Provider's request, shall allow
the Indemnity Provider to conduct and control such contest and (B) in
the case of any contest, the Indemnified Person may request the
Indemnity Provider to conduct and control such contest (with counsel
to be selected by the Indemnity Provider and consented to by such
Indemnified Person, such consent not to be unreasonably withheld;
provided, however, that any Indemnified Person may retain separate
counsel at the expense of the Indemnity Provider in the event of a
conflict)) by, in the sole discretion of the Person conducting and
controlling such contest, (1) resisting payment thereof, (2) not
paying the same except under protest, if protest is necessary and
proper, (3) if the payment be made, using reasonable efforts to obtain
a refund thereof in appropriate administrative and judicial
proceedings, or (4) taking such other action as is reasonably
requested by the Indemnity Provider from time to time.
(iii) The party controlling any contest shall consult in good
faith with the non-controlling party and shall keep the non-
controlling party reasonably informed as to the conduct of such
contest; provided, that all decisions ultimately shall be made in the
sole discretion of the controlling party. The parties agree that an
Indemnified Person may at any time decline to take further action with
respect to the contest of any Imposition and may settle such contest
if such Indemnified Person shall waive its rights to any indemnity
from the Indemnity Provider that otherwise would be payable in respect
of such Claim (and any future Claim by any taxing authority, the
contest of which is precluded by reason of such resolution of such
Claim) and shall pay to the Indemnity Provider any amount previously
paid or advanced by the Indemnity Provider pursuant to this Section
13.2 by way of indemnification or advance for the payment of an
Imposition other than expenses of such contest.
<PAGE>
(iv) Notwithstanding the foregoing provisions of this
Section 13.2, an Indemnified Person shall not be required to take any
action and no Indemnity Provider shall be permitted to contest any
Impositions in its own name or that of the Indemnified Person unless
(A) the Indemnity Provider shall have agreed to pay and shall pay to
such Indemnified Person on demand and on an After Tax Basis all
reasonable third party and out-of-pocket costs, losses and expenses
that such Indemnified Person actually incurs in connection with
contesting such Impositions, including, without limitation, all
reasonable legal, accounting and investigatory fees and disbursements,
(B) in the case of a Claim that must be pursued in the name of an
Indemnified Person (or an Affiliate thereof), the amount of the
potential indemnity (taking into account all similar or logically
related Claims that have been or could be raised in any audit
involving such Indemnified Person for which the Indemnity Provider may
be liable to pay an indemnity under this Section 13.2) exceeds
$75,000, (C) the Indemnified Person shall have reasonably determined
that the action to be taken will not result in any material danger of
sale, forfeiture or loss of any Property, or any part thereof or
interest therein, will not interfere with the payment of Rent, and
will not result in risk of criminal liability, (D) if such contest
shall involve the payment of the Imposition prior to the contest, the
Indemnity Provider shall provide to the Indemnified Person an
interest-free advance in an amount equal to the Imposition that the
Indemnified Person is required to pay (with no additional net after-
tax cost to such Indemnified Person), and (E) no Event of Default
shall have occurred and be continuing. In no event shall an
Indemnified Person be required to appeal an adverse judicial
determination to the United States Supreme Court. In addition, an
Indemnified Person shall not be required to contest any Claim in its
name (or that of an Affiliate) if the subject matter thereof shall be
of a continuing nature and shall have previously been decided
adversely by a court of competent jurisdiction pursuant to the contest
provisions of this Section 13.2, unless there shall have been a change
in law (or interpretation thereof) and the Indemnified Person shall
have received, at the Indemnity Provider's expense, an opinion of
independent tax counsel selected by the Indemnified Person and
reasonably acceptable to the Indemnity Provider stating that as a
result of such change in law (or interpretation thereof), it is more
likely than not that the Indemnified Person will prevail in such
contest.
(g) EXCEPTION. Notwithstanding anything to the contrary in Sections
13.2(a) or (b) hereof, an Indemnity Provider shall not be required to
indemnify any Indemnified Person to the extent that any action taken or
failed to be taken by any Indemnified Person causes or otherwise results in
the amount of any tax-related Imposition or other tax-related indemnifiable
liability to be greater than the amount such Imposition or liability would
otherwise have been; PROVIDED THAT, this exception shall only apply to the
extent that: (i) such action or inaction restricts, limits or otherwise
expressly or impliedly modifies or amends one or more of the provision of
the Operative Agreements without the consent of the Indemnity Provider and
such restriction, limitation or modification results in an increase in the
amount of a tax-related Imposition or other tax-related indemnifiable
liability; or (ii) such action or inaction constitutes gross negligence or
willful misconduct on the part of an Indemnified Person, or constitutes a
material breach of a covenant applicable to an Indemnified Person under the
Operative Agreements.
<PAGE>
C. JOINT AND SEVERAL OBLIGATIONS OF THE INDEMNITY PROVIDER.
Notwithstanding any of the provisions of any other Operative Agreement,
Foundation Health Medical Services and Foundation Health Corporation hereby
acknowledge and agree that such entities have jointly and severally assumed and
undertaken the indemnity obligations and other obligations under this Section
13.
SECTION 14 MISCELLANEOUS.
A. SURVIVAL OF AGREEMENTS. The representations, warranties, covenants,
indemnities and agreements of the parties provided for in the Operative
Agreements, and the parties' obligations under any and all thereof, shall
survive the execution and delivery of this Agreement, the transfer of any
Property to the Owner Trustee, the acquisition of any Equipment, the
construction of any Improvements, any disposition of any interest of the Owner
Trustee in any Property or any interest of the Holders in the Owner Trust, the
payment of the Notes and any disposition thereof and shall be and continue in
effect notwithstanding any investigation made by any party and the fact that any
party may waive compliance with any of the other terms, provisions or conditions
of any of the Operative Agreements. Except as otherwise expressly set forth
herein or in other Operative Agreements, the indemnities of the parties provided
for in the Operative Agreements shall survive the expiration or termination of
any thereof.
B. NO BROKER, ETC. Each of the parties hereto represents to the others
that it has not retained or employed any broker, finder or financial adviser to
act on its behalf in connection with this Agreement, nor has it authorized any
broker, finder or financial adviser retained or employed by any other Person so
to act. Any party who is in breach of this representation shall indemnify and
hold the other parties harmless from and against any liability arising out of
such breach of this representation.
<PAGE>
C. NOTICES. Unless otherwise specifically provided herein, all notices,
consents, directions, approvals, instructions, requests and other communications
required or permitted by the terms hereof to be given to any Person shall be
given in writing by United States mail, by nationally recognized courier service
or by hand and any such notice shall become effective upon receipt and shall be
directed to the address of such Person as indicated:
If to the Lessee, the Construction Agent or the Guarantor, to it at the
following address:
Foundation Health Corporation
3400 Data Drive
Rancho Cordova, California 95670
Attn: Chief Financial Officer
Telephone No.: (916) 631-5000
Telecopy No.: (916) 631-5335
If to the Owner Trustee, to it at the following address:
First Security Bank of Utah, N.A.
79 South Main Street
Salt Lake City, Utah 84111
Attn: Val T. Orton
Telephone No.: (801) 246-5300
Telecopy No.: (801) 246-5053
If to the Holders, to each such Holder at the following address:
Sumitomo Bank Leasing and Finance, Inc.
277 Park Avenue
New York, New York 10172
Attn: Chief Credit Officer
Telephone No.: (212) 224-5205
Telecopy No.: (212) 224-5222
The Bank of Nova Scotia
101 California Street, 48th Floor
San Francisco, California 94111
Attn: Alan Pendergast
Telephone No.: (415) 986-1100
Telecopy No.: (415) 397-0791
<PAGE>
NationsBank of Texas, N.A.
444 S. Flower Street, Suite 1500
Los Angeles, California 90071
Attn: Mr. Brad DeSpain
Telephone No.: (213) 234-4912
Telecopy No.: (213) 624-5815
If to the Agent, to it at the following address:
NationsBank of Texas, N.A.
444 S. Flower Street, Suite 1500
Los Angeles, California 90071
Attn: Mr. Brad DeSpain
Telephone No.: (213) 236-4912
Telecopy No.: (213) 624-5815
With a copy to:
NationsBank of Texas, N.A.
Corporate Credit Services
901 Main Street, 13th Floor
Dallas, Texas 95201
Attn: Marie Lancaster
Telecopy No.: (214) 508-2515
<PAGE>
From time to time any party may designate a new address for purposes of
notice hereunder by notice to each of the other parties hereto.
D. COUNTERPARTS. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute but one and the
same instrument.
E. AMENDMENTS AND TERMINATION. Neither this Agreement nor any of the
terms hereof may be terminated, amended, supplemented, waived or modified except
by an instrument in writing signed by the party against which the enforcement of
the termination, amendment, supplement, waiver or modification shall be sought.
This Agreement may be terminated by an agreement signed in writing by the Owner
Trustee, the Holders, the Lessee, the Guarantor, the Agent and the Lenders.
F. HEADINGS, ETC. The Table of Contents and headings of the various
Articles and Sections of this Agreement are for convenience of reference only
and shall not modify, define, expand or limit any of the terms or provisions
hereof.
G. PARTIES IN INTEREST. Except as expressly provided herein, none of the
provisions of this Agreement are intended for the benefit of any Person except
the parties hereto; provided, that the Lenders are intended to be third-party
beneficiaries of this Agreement.
H. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL; FINAL
AGREEMENT.
(a) THIS AGREEMENT AND THE OTHER OPERATIVE AGREEMENTS AND THE RIGHTS
AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE GOVERNED
BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF CALIFORNIA, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES OF
SUCH STATE (EXCEPT TO THE EXTENT MATTERS RELATED TO A PROPERTY ARE
NECESSARILY GOVERNED BY THE LAW OF THE STATE IN WHICH SUCH PROPERTY IS
LOCATED).
(b) THE LESSEE, THE GUARANTOR, THE AGENT, THE HOLDERS, THE LESSOR AND
THE TRUST COMPANY, TO THE FULLEST EXTENT PERMITTED BY LAW, EACH HEREBY
KNOWINGLY, INTENTIONALLY AND VOLUNTARILY, WITH AND UPON THE ADVICE OF
COMPETENT COUNSEL, (i) SUBMITS TO PERSONAL JURISDICTION IN THE STATE OF
CALIFORNIA OVER ANY SUIT, ACTION OR PROCEEDING BY ANY PERSON ARISING FROM
OR RELATING TO THIS AGREEMENT OR ANY OTHER OF THE OPERATIVE AGREEMENTS,
(ii) AGREES THAT ANY SUCH ACTION, SUIT OR PROCEEDING MAY BE BROUGHT IN ANY
STATE OR FEDERAL COURT OF COMPETENT JURISDICTION SITTING IN LOS ANGELES
COUNTY, CALIFORNIA, (iii) SUBMITS TO THE JURISDICTION OF SUCH COURTS, AND
(iv) TO THE FULLEST EXTENT PERMITTED BY LAW, THE LESSEE AND THE GUARANTOR
AGREE THAT THEY WILL NOT BRING ANY ACTION, SUIT OR PROCEEDING IN ANY FORUM
OTHER THAN LOS ANGELES COUNTY, CALIFORNIA (BUT NOTHING HEREIN SHALL AFFECT
THE RIGHT OF AGENT (ON BEHALF OF THE LENDERS) OR THE TRUSTEE (ON BEHALF OF
THE HOLDERS OR THE LENDERS) TO BRING ANY ACTION, SUIT OR PRECEDING IN ANY
OTHER FORUM. THE LESSEE, THE GUARANTOR, THE AGENT, THE HOLDERS, THE LESSOR
AND THE TRUST COMPANY EACH FURTHER CONSENTS AND AGREES TO SERVICE OF ANY
SUMMONS, COMPLAINT OR OTHER LEGAL PROCESS IN ANY SUCH SUIT, ACTION OR
PROCEEDING BY REGISTERED OR CERTIFIED U.S. MAIL, POSTAGE PREPAID, TO SUCH
PERSON AT THE ADDRESS FOR NOTICES DESCRIBED IN SECTION 14.3 HEREOF, AND
CONSENTS AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE IN EVERY RESPECT
VALID AND EFFECTIVE SERVICE (BUT NOTHING HEREIN SHALL AFFECT THE VALIDITY
OR EFFECTIVENESS OF PROCESS SERVED IN ANY OTHER MANNER PERMITTED BY LAW).
<PAGE>
(c) THE LESSEE, THE GUARANTOR, THE AGENT, THE HOLDERS, THE LESSOR AND
THE TRUST COMPANY, TO THE FULLEST EXTENT PERMITTED BY LAW, EACH HEREBY
KNOWINGLY, INTENTIONALLY AND VOLUNTARILY, WITH AND UPON THE ADVICE OF
COMPETENT COUNSEL, WAIVES, RELINQUISHES AND FOREVER FORGOES THE RIGHT TO A
TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN
ANY WAY RELATING TO THIS AGREEMENT, OR IN CONNECTION WITH ANY OF THE OTHER
OPERATIVE AGREEMENTS, IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN
CONTRACT, TORT OR OTHERWISE.
(d) THE WRITTEN OPERATIVE AGREEMENT REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
I. SEVERABILITY. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
J. LIABILITY LIMITED.
(a) The Agent, the Lessee, the Guarantor and the Holders each
acknowledge and agree that the Owner Trustee is (except as otherwise
expressly provided herein or therein) entering into this Agreement and the
other Operative Agreements to which it is a party (other than the Trust
Agreement and to the extent otherwise provided in Section 7.2 of this
Agreement), solely in its capacity as trustee under the Trust Agreement and
not in its individual capacity and that Trust Company shall not be liable
or accountable under any circumstances whatsoever in its individual
capacity for or on account of any statements, representations, warranties,
covenants or obligations stated to be those of the Owner Trustee, except
for its own gross negligence or willful misconduct and as otherwise
expressly provided herein or in the other Operative Agreements.
(b) Anything to the contrary contained in this Agreement, the Credit
Agreement, the Notes or in any other Operative Agreement notwithstanding,
neither the Lessor nor any Holder nor any officer, director, shareholder,
or partner thereof, nor any of the successors or assigns of the foregoing
(all such Persons being hereinafter referred to collectively as the
"Exculpated Persons"), shall be personally liable in any respect for any
liability or obligation relating to the payment of the principal of, or
interest on, the Notes. The Agent (for itself and on behalf of the
Lenders) agrees that, in the event the Agent or any Lender pursues any
remedies available to them under the Credit Agreement, the Notes, this
Agreement, the Security Agreement, the Mortgage Instruments or under any
other Operative Agreement, neither the Lenders nor the Agent shall have any
recourse against any Exculpated Person, for any deficiency, loss or Claim
for monetary damages or otherwise resulting therefrom and recourse shall be
had solely and exclusively against the Trust Estate and the Lessee; but
nothing contained herein shall be taken to prevent recourse against or the
enforcement of remedies against the Trust Estate in respect of any and all
liabilities, obligations and undertakings contained herein, in the Credit
Agreement, in the Notes, in the Security Agreement, the Mortgage
Instruments or in any other Operative Agreement. Notwithstanding the
provisions of this Section, nothing in this Agreement, the Credit
Agreement, the Notes, the Security Agreement, the Mortgage Instruments or
any other Operative Agreement shall: (i) constitute a waiver, release or
discharge of any indebtedness or obligation evidenced by the Notes or
arising under this Agreement, the Security Agreement, the Mortgage
Instruments or the Credit Agreement or secured by the Security Agreement,
the Mortgage Instruments or any other Operative Agreement, but the same
shall continue until paid or discharged; (ii) relieve the Lessor from
liability and responsibility for (but only to the extent of the damages
arising by reason of): (a) active waste knowingly committed by the Lessor
with respect to the Properties or (b) any fraud on the part of the Lessor
or any such Exculpated Person; (iii) relieve the Lessor from liability and
responsibility for (but only to the extent of the moneys misappropriated,
misapplied or not turned over) misappropriation or misapplication by the
Lessor (i.e., application in a manner contrary to any Operative Agreement)
of any insurance proceeds
<PAGE>
or condemnation award paid or delivered to the Lessor by any Person other
than the Agent, or any deposits or any escrows or amounts owed by the
Lessee under the Agency Agreement held by the Lessor, or any rents or other
income received by the Lessor from the Lessee that are not turned over to
the Agent; or (iv) affect or in any way limit the Agent's rights and
remedies under any Operative Agreement with respect to the Rents and its
rights and powers thereunder or to obtain a judgment against the Lessor's
interest in the Properties or to the extent the Lessor may be personally
liable as otherwise contemplated in clauses (ii) and (iii) of this Section.
K. RIGHTS OF LESSEE. Notwithstanding any provision of the Operative
Agreements, if at any time all obligations (i) of the Owner Trustee under the
Credit Agreement and the Security Documents and (ii) of the Lessee under the
Operative Agreements have in each case been satisfied or discharged in full,
then the Lessee shall be entitled to (a) terminate the Lease and (b) receive all
amounts then held under the Operative Agreements and all proceeds with respect
to any of the Properties. Upon the termination of the Lease pursuant to the
foregoing clause (a), the Lessor shall transfer to the Lessee all of its right,
title and interest in and to any Properties then subject to the Lease and any
amounts or proceeds referred to in the foregoing clause (b) shall be paid over
to the Lessee.
L. FURTHER ASSURANCES. The parties hereto shall promptly cause to be
taken, executed, acknowledged or delivered, at the sole expense of the Lessee
and the Guarantor, all such further acts, conveyances, documents and assurances
as the other parties may from time to time reasonably request in order to carry
out and effectuate the intent and purposes of this Participation Agreement, the
other Operative Agreements and the transactions contemplated hereby and thereby
(including, without limitation, the preparation, execution and filing of any and
all Uniform Commercial Code financing statements and other filings or
registrations which the parties hereto may from time to time request to be filed
or effected). The Lessee and the Guarantor, at their own expense and without
need of any prior request from any other party, shall take such action as may be
necessary (including any action specified in the preceding sentence), or (if
Owner Trustee shall so request) as so requested, in order to maintain and
protect all security interests provided for hereunder or under any other
Operative Agreement.
M. CALCULATIONS UNDER OPERATIVE AGREEMENTS. The parties hereto agree that
all calculations and numerical determinations to be made under the Operative
Agreements by the Owner Trustee shall be made by the Agent.
N. CONFIDENTIALITY. Each of the Owner Trustee, the Holders, the Agent and
the Lenders severally agrees to use reasonable efforts to keep confidential all
non-public information pertaining to the Guarantor, the Lessee and their
respective Subsidiaries which is provided to it by the Guarantor, the Lessee or
their Subsidiaries, and shall not disclose such information to any Person
except:
1. to the extent such information is public when received by such
Person or becomes public thereafter due to the act or omission of any party
other than such Person;
2. to the extent such information is independently obtained from a
source other than the Lessee or the Guarantor or any of their Subsidiaries
and such information from such source is not, to such Person's knowledge,
subject to an obligation of confidentiality or, if such information is
subject to an obligation of confidentiality, that disclosure of such
information is permitted;
<PAGE>
3. to counsel, auditors or accountants retained by any such Person
or any Affiliates of any such Person provided they agree to keep such
information confidential as if such Person or Affiliate were party to this
Agreement and to financial institution regulators, including examiners of
any Lender, the Agent or the Owner Trustee, any Holder or any Affiliate in
the course of examinations of such Persons;
4. in connection with any litigation or the enforcement or
preservation of the rights of the Agent, the Owner Trustee, the Lessor, any
Lender or any Holder under the Operative Agreements;
5. to the extent required by any applicable statute, rule or
regulation or court order (including, without limitation, by way of
subpoena) or pursuant to the request of any regulatory or Governmental
Authority having jurisdiction over any such Person; provided, however, that
such Person shall endeavor (if not otherwise prohibited by Law) to notify
the Lessee prior to any disclosure made pursuant to this clause (e), except
that no such Person shall be subject to any liability whatsoever for any
failure to so notify the Lessee;
6. the Agent may disclose such information to the Lenders and the
Owner Trustee may disclose such information to the Holders; or
7. to the extent disclosure to other financial institutions or other
Persons is appropriate in connection with any proposed or actual (i)
assignment or grant of a participation by any of the Lenders of interests
in the Credit Agreement and/or any Note to such other financial
institutions (who will in turn be required by the Agent to agree in writing
to maintain confidentiality as if they were Lenders originally party to the
Credit Agreement) or (ii) assignment by any Holder of interests in the
Trust Agreement to another Person (who will in turn be required by the
transferring Holder to agree in writing to maintain confidentiality as if
it were a Holder originally party to this Participation Agreement).
<PAGE>
[signature pages follow]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective officers thereunto duly authorized as of the
day and year first above written.
FOUNDATION HEALTH MEDICAL SERVICES, as Construction Agent and as Lessee
By:
----------------------
Name:
--------------------
Title:
-------------------
FOUNDATION HEALTH CORPORATION,
as Guarantor
By:
---------------------
Name:
-------------------
Title:
------------------
<PAGE>
FIRST SECURITY BANK OF UTAH, N.A.,
not individually, except as expressly stated herein, but solely as Owner Trustee
under the FH Trust 1995-1
By:
---------------------
Name:
-------------------
Title:
------------------
SUMITOMO BANK LEASING AND FINANCE, INC., as a Holder
By:
---------------------
Name:
-------------------
Title:
------------------
THE BANK OF NOVA SCOTIA, as a Holder
By:
---------------------
Name:
-------------------
Title:
------------------
NATIONSBANK OF TEXAS, N.A., as a Holder
By:
---------------------
Name:
-------------------
Title:
------------------
NATIONSBANK OF TEXAS, N.A.,
as Administrative Agent and as a
Lender
By:
---------------------
Name:
-------------------
Title:
------------------
THE SUMITOMO BANK, LIMITED,
SAN FRANCISCO BRANCH, as a Lender
By:
---------------------
Name:
-------------------
Title:
------------------
THE BANK OF NOVA SCOTIA, as a Lender
By:
---------------------
Name:
-------------------
Title:
------------------
<PAGE>
EXHIBIT A
REQUISITION FORM
(Pursuant to Sections 4.2 and 5.2 of the Participation Agreement)
Foundation Health Medical Services, a California corporation ("FOUNDATION")
hereby certifies as true and correct and delivers the following Requisition to
First Security Bank of Utah, N.A., not individually, except as expressly stated
in the Participation Agreement (hereinafter defined), but solely as Owner
Trustee under the FH Trust 1995-1 ("LESSOR"), ____________________ and
________________, as holders (the "HOLDERS") and NationsBank of Texas, N.A., as
Administrative Agent for the Lenders pursuant to the Credit Agreement (the
"AGENT"):
Reference is made herein to that certain Participation Agreement dated as
of __________ ___, 1995 (as such may be amended from time to time, the
"PARTICIPATION AGREEMENT") among Foundation, in its capacity as Lessee,
Foundation Health Corporation, as Guarantor and as Construction Agent, the
Lessor, the Holders and the Agent. Capitalized terms used herein but not
otherwise defined herein shall have the meanings set forth therefor in the
Participation Agreement.
Check one:
____ INITIAL CLOSING DATE: _________________
(one Business Day prior notice required for Advance)
____ PROPERTY CLOSING DATE:_________________
(three Business Days prior notice required for Advance)
____ CONSTRUCTION ADVANCE DATE:_____________
(three Business Days prior notice required for Advance)
1. On a Property by Property basis, Transaction Expenses and other fees,
expenses and disbursements under Section 9.1(a) or (b) of the Participation
Agreement and any and all Property Costs and other amounts contemplated to
be financed under the Participation Agreement including without limitation
any Work, broker's fees, taxes, recording fees and the like (with
supporting invoices attached):
Party to Whom Amount Owed
Amount is Owed (in U.S. Dollars)
Total:
2. Legal Description of Land (which shall be a legal description of the Land
in connection with an Advance to pay Property Acquisition Costs and which
shall otherwise be a street address for the applicable Property): See
attached SCHEDULE 1
3. Aggregate Loans and Holder Advances requested since the Initial Closing
Date with respect to each Property for which Advances are requested under
this Requisition (listed on a Property by Property basis), including all
amounts requested under this Requisition:
In connection with this Requisition, Foundation hereby requests that the
Lenders make Loans to the Lessor in the amount of $______________ and that the
Holder make a Holder Advance to the Lessor in the amount of $________________.
Foundation hereby certifies (i) that the foregoing amounts requested do not
exceed the total aggregate of the Available Commitments plus the Available
Holder Commitment and (ii) that each of the provisions of the Participation
Agreement applicable to the Loans and the Holder Advances requested hereunder
have been compiled with as of the date of this Requisition.
Foundation has caused this Requisition to the executed by its duly
authorized officer as of this _____ day of __________, 199__.
FOUNDATION HEALTH MEDICAL SERVICES
By:
---------------------
Name:
-------------------
Title:
------------------
<PAGE>
SCHEDULE 1
Legal Description of Land
<PAGE>
EXHIBIT B
FOUNDATION HEALTH MEDICAL SERVICES
OFFICER'S CERTIFICATE
(Pursuant to Section 5.6 of the Participation Agreement)
FOUNDATION HEALTH MEDICAL SERVICES, a California corporation (the "Company")
DOES HEREBY CERTIFY as follows:
1. The address for the subject Property is ___________________
__________________________________.
2. The Completion Date for the construction of Improvements at the Property
occurred on ______________.
3. The aggregate Property Cost for the Property was $___________.
4. All Improvements have been made in accordance with all applicable material
Legal Requirements, in a good and workmanlike manner and otherwise in
substantial compliance with the standards and practices of the Company with
respect to Company-owned properties and improvements.
Capitalized terms used in this Officer's Certificate and not otherwise defined
have the respective meanings ascribed thereto in the Participation Agreement
dated as of __________ __, 1995 among the Company, as Lessee, Foundation Health
Corporation, as Guarantor, ___________________ and __________________ as
Holders, First Security Bank of Utah, N.A., as Owner Trustee and NationsBank of
Texas, N.A., as the Administrative Agent.
IN WITNESS WHEREOF, the Company has caused this Officer's Certificate to be duly
executed and delivered as of this ____ day of ______________, 199__.
FOUNDATION HEALTH MEDICAL SERVICES
By:
---------------------
Name:
-------------------
Title:
------------------
<PAGE>
EXHIBIT A
<PAGE>
EXHIBIT C
[Outside Counsel Opinion for Lessee and Guarantor]
(Pursuant to Section 6.1(c) of the Participation Agreement)
__________ ___, 1995
<PAGE>
TO THOSE ON THE ATTACHED DISTRIBUTION LIST
Re: Tax Retention Operating Lease Financing Provided in favor of
Foundation Health Medical Services
Dear Sirs:
We have acted as special counsel to Foundation Health Medical Services, a
California corporation (the "Lessee") and Foundation Health Corporation, a
Delaware corporation (the "Guarantor"), in connection with certain transactions
contemplated by the Participation Agreement dated as of __________ ___, 1995
(the "Participation Agreement"), among the Lessee, First Security Bank of Utah,
N.A. (the "Owner Trustee"), the Guarantor, ____________________ and
__________________, as Holders (the "Holders") and NationsBank of Texas, N.A.,
as the administrative agent for the Lenders (the "Administrative Agent"). This
opinion is delivered pursuant to Section 6.1(c) of the Participation Agreement.
All capitalized terms used herein, and not otherwise defined herein, shall have
the meanings assigned thereto in Appendix A to the Participation Agreement.
In connection with the foregoing, we have examined originals, or copies
certified to our satisfaction, of the Operative Agreements, and such other
corporate documents and records of the Lessee and the Guarantor, certificates of
public officials and representatives of the Lessee and the Guarantor as to
certain factual matters, and such other instruments and documents which we have
deemed necessary or advisable to examine for the purpose of this opinion. With
respect to such examination, we have assumed (i) the statements of fact made in
all such certificates, documents and instruments are true, accurate and
complete; (ii) the due authorization, execution and delivery of the Operative
Agreements by the parties thereto other than the Lessee or the Guarantor; (iii)
the genuineness of all signatures (other than the signatures of persons signing
on behalf of the Lessee and the Guarantor), the authenticity and completeness of
all documents, certificates, instruments, records and corporate records
submitted to us as originals and the conformity to the original instruments of
all documents submitted to us as copies, and the authenticity and completeness
of the originals of such copies; (iv) that all parties other than the Lessee or
the Guarantor have all requisite corporate power and authority to execute,
deliver and perform the Operative Agreements; and (v) the enforceability of the
Operative Agreements against all parties thereto other than the Lessee or the
Guarantor.
Based on the foregoing, and having due regard for such legal considerations as
we deem relevant, and subject to the limitations and assumptions set forth
herein, including the matters set forth in the last two paragraphs hereof, we
are of the opinion that:
(a) The Lessee is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of California and has the corporate
power and authority to conduct its business as presently conducted and to
execute, deliver and perform its obligations under the Operative Agreements to
which it is a party. The Lessee is duly qualified as a foreign corporation to
do business and is in good standing in the States of ____________ and
____________ and all other jurisdictions in which its failure to so qualify
would materially impair its ability to perform its obligations under the
Operative Agreements to which it is a party or its financial position or its
business as now and now proposed to be conducted.
(b) The Guarantor is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Delaware and has the corporate
power and authority to conduct its business as presently conducted and to
execute, deliver and perform its obligations under the Operative Agreements to
which it is a party. The Guarantor is duly qualified as a foreign corporation
to do business and is in good standing in all jurisdictions in which its failure
to so qualify would materially impair its ability to perform its obligations
under the Operative Agreements to which it is a party or its financial position
or its business as now and now proposed to be conducted.
(c) The execution, delivery and performance by the Lessee of the Operative
Agreements to which it is a party have been duly authorized by all necessary
corporate action on the part of the Lessee and the Operative Agreements to which
the Lessee is a party have been duly executed and delivered by the Lessee.
<PAGE>
(d) The execution, delivery and performance by the Guarantor of the
Operative Agreements to which it is a party have been duly authorized by all
necessary corporate action on the part of the Guarantor and the Operative
Agreements to which the Guarantor is a party have been duly executed and
delivered by the Guarantor.
(e) The Operative Agreements to which the Lessee is a party constitute
valid and binding obligations of the Lessee enforceable against the Lessee in
accordance with the terms thereof, subject to bankruptcy, insolvency,
liquidation, reorganization, fraudulent conveyance, and similar laws affecting
creditors' rights generally, and general principles of equity (regardless of
whether the application of such principles is considered in a proceeding in
equity or at law).
(f) The Operative Agreements to which the Guarantor is a party constitute
valid and binding obligations of the Guarantor enforceable against the Guarantor
in accordance with the terms thereof, subject to bankruptcy, insolvency,
liquidation, reorganization, fraudulent conveyance, and similar laws affecting
creditors' rights generally, and general principles of equity (regardless of
whether the application of such principles is considered in a proceeding in
equity or at law). Without limiting the generality of the foregoing the Owner
Trustee or the Agent, as applicable, shall have the right to proceed against the
Guarantor under the Guaranty Agreement and obtain and enforce a judgment
thereunder following an Event of Default without first having to proceed against
the Lessee or any other Person or against any security held by the Owner Trustee
or the Agent at any time or having to pursue any other remedy available to the
Owner Trustee or the Agent under any of the Operative Agreements, and without
waiving any security, rights or remedies that the Owner Trustee or the Agent may
have under any of the other Operative Agreements.
(gP The execution and delivery by the Lessee of the Operative Agreements
to which it is a party and compliance by the Lessee with all of the provisions
thereof do not and will not (i) contravene the provisions of, or result in any
breach of or constitute any default under, or result in the creation of any Lien
(other than Permitted Liens) upon any of its property under, its Certificate of
Incorporation or By-Laws or any indenture, mortgage, chattel mortgage, deed of
trust, lease, conditional sales contract, bank loan or credit agreement or other
agreement or instrument to which the Lessee is a party or by which it or any of
its property may be bound or affected, or (ii) contravene any Laws or any order
of any Governmental Authority applicable to or binding on the Lessee.
(h) The execution and delivery by the Guarantor of the Operative
Agreements to which it is a party and compliance by the Guarantor with all of
the provisions thereof do not and will not (i) contravene the provisions of, or
result in any breach of or constitute any default under, or result in the
creation of any Lien (other than Permitted Liens) upon any of its property
under, its Certificate of Incorporation or By-Laws or any indenture, mortgage,
chattel mortgage, deed of trust, lease, conditional sales contract, bank loan or
credit agreement or other agreement or instrument to which the Guarantor is a
party or by which it or any of its property may be bound or affected, or (ii)
contravene any Laws or any order of any Governmental Authority applicable to or
binding on the Guarantor.
(i) No Governmental Action by, and no notice to or filing with, any
Governmental Authority is required for the due execution, delivery or
performance by the Lessee of any of the Operative Agreements to which it is a
party.
(j) No Governmental Action by, and no notice to or filing with, any
Governmental Authority is required for the due execution, delivery or
performance by the Guarantor of any of the Operative Agreements to which it is a
party.
(k) There are no actions, suits or proceedings pending or to our
knowledge, threatened against the Lessee in any court or before any Governmental
Authority, that concern any Property or the Lessee's interest therein or that
question the validity or enforceability of any Operative Agreement to which the
Lessee is a party or the overall transaction described in the Operative
Agreements to which the Lessee is a party.
(l) There are no actions, suits or proceedings pending or to our
knowledge, threatened against the Guarantor in any court or before any
Governmental Authority or that question the validity or enforceability of any
Operative Agreement to which the Guarantor is a party or the overall transaction
described in the Operative Agreements to which the Guarantor is a party.
(m) Neither the nature of the Properties, nor any relationship between the
Lessee and any other Person, nor any circumstance in connection with the
execution, delivery and performance of the Operative Agreements to which the
Lessee is a party is such as to require any approval of stockholders of, or
approval or consent of any trustee or holders of indebtedness of, the Lessee,
except for such approvals and consents which have been duly obtained and are in
full force and effect.
(n) Neither the nature of the Properties, nor any relationship between the
Guarantor and any other Person, nor any circumstance in connection with the
execution, delivery and performance of the Operative Agreements to which the
Guarantor is a party is such as to require any approval of stockholders of, or
approval or consent of any trustee or holders of indebtedness of, the Guarantor,
except for such approvals and consents which have been duly obtained and are in
full force and effect.
<PAGE>
(o) The Credit Agreement creates, for the benefit of the holders of the
Notes, the security interest in the Trust Estate which by its terms it purports
to create.
(p) The issuance, sale and delivery of the Notes and the issuance and
delivery of the Certificates under the circumstances contemplated by the
Participation Agreement do not, under existing law, require registration of the
Notes or the certificates being issued on the date hereof under the Securities
Act of 1933, as amended, the California Corporate Securities Law of 1968, as
amended, or the qualification of the Loan Agreement under the Trust Indenture
Act of 1939, as amended.
(q) The Operative Agreements (other than the Trust Agreement) to which
First Security Bank of Utah, N.A., individually or as Owner Trustee, as the case
may be, is a party constitute valid and binding obligations of First Security
Bank of Utah, N.A., individually or as Owner Trustee, as the case may be,
enforceable against First Security Bank of Utah, N.A., individually or as Owner
Trustee, in accordance with the terms thereof, subject to bankruptcy,
insolvency, liquidation, reorganization, fraudulent conveyance, and similar laws
affecting creditors, rights generally, and general principles of equity
(regardless of whether the application of such principles is considered in a
proceeding in equity or at law).
(r) The execution and delivery by First Security Bank of Utah, N.A.,
individually or as Owner Trustee, as the case may be, of the Operative
Agreements (other than the Trust Agreement) to which it is a party and
compliance by First Security Bank of Utah, N.A., individually or as Owner
Trustee, with all of the provisions thereof do not and will not contravene any
law, rule or regulation of the States of ____________ or ___________.
(s) The amounts to be paid by the Lessee and the Borrower under the
Operative Agreements do not violate the usury laws of the State of California.
(t) The choice of law and choice of forum provisions in each of the
Operative Agreements will be enforced by the courts of the State of California.
(u) No intangibles tax, mortgage recording tax, documentary transfer tax
or similar taxes or charges, other than nominal recordation or filing fees, are
required to be paid as a condition of the legality or enforceability of the
Operative Agreements.
This opinion is limited to the matters stated herein and no opinion is
implied or may be inferred beyond the matters stated herein. This opinion is
based on and is limited to the laws of the States of ____________ and
____________ [STATES OF PROPERTY LOCATIONS] the federal laws of the United
States of America and, as applicable, the General Corporation Law of the States
of Delaware and California. Insofar as the foregoing opinion relates to matters
of law other than the foregoing, no opinion is hereby given.
This opinion is for the sole benefit of Lessee, Guarantor, NationsBank of Texas,
N.A, as the Administrative Agent, the Holders and First Security Bank of Utah,
N.A., not individually, but solely as Owner Trustee under the FH Trust 1995-1
and may not be relied upon by any other person other than such parties and their
successors and assigns without the express written consent of the undersigned.
The opinions expressed herein are as of the date hereof and we make no
undertaking to amend or supplement such opinions if facts come to our attention
or changes in the current law of the jurisdictions mentioned herein occur which
could affect such opinions.
Very truly yours,
[LESSEE'S OUTSIDE COUNSEL]
<PAGE>
Distribution List
NationsBank of Texas, N.A., as Administrative Agent
Foundation Health Medical Services
Foundation Health Corporation
______________________, as a Holder
______________________, as a Holder
First Security Bank of Utah, N.A., not individually, but solely as Owner Trustee
under the FH Trust 1995-1
<PAGE>
EXHIBIT D
FOUNDATION HEALTH MEDICAL SERVICES
OFFICER'S CERTIFICATE
(Pursuant to Section 6.1(g) of the Participation Agreement)
FOUNDATION HEALTH MEDICAL SERVICES, a California corporation (the
"Company"), DOES HEREBY CERTIFY as follows:
1. Each and every representation and warranty of the Company contained in the
Operative Agreements to which it is a party is true and correct on and as
of the date hereof.
2. No Default or Event of Default has occurred and is continuing under any
Operative Agreement.
3. Each Operative Agreement to which the Company is a party is in full force
and effect with respect to it.
4. The Company has duly performed and complied with all covenants, agreements
and conditions contained in the Participation Agreement (hereinafter
defined) or in any Operative Agreement required to be performed or complied
with by it on or prior to the date hereof.
Capitalized terms used in this Officer's Certificate and not otherwise defined
herein have the respective meanings ascribed thereto in the Participation
Agreement dated as of __________ ___, 1995 among the Company, as Lessee,
Foundation Health Corporation, as Guarantor, __________________ and
___________________, as Holders, First Security Bank of Utah, N.A., as the Owner
Trustee and NationsBank of Texas, N.A., as the Administrative Agent.
IN WITNESS WHEREOF, the Company has caused this Officer's Certificate to be duly
executed and delivered as of this _____ day of __________, 1995.
[FOUNDATION HEALTH MEDICAL SERVICES/FOUNDATION
HEALTH CORPORATION]
By:
---------------------
Name:
-------------------
Title:
------------------
<PAGE>
EXHIBIT E
FOUNDATION HEALTH MEDICAL SERVICES
OFFICER'S CERTIFICATE
(Pursuant to Section 6.1(h) of the Participation Agreement)
FOUNDATION HEALTH MEDICAL SERVICES, a California corporation (the "Company")
DOES HEREBY CERTIFY as follows:
1. Attached hereto as EXHIBIT A is a true, correct and complete copy of the
resolutions of the Board of Directors of the Company duly adopted by the Board
of Directors of the Company on __________. Such resolutions have not been
amended, modified or rescinded since their date of adoption and remain in full
force and effect as of the date hereof.
2. Attached hereto as EXHIBIT B is a true, correct and complete copy of the
Articles of Incorporation of the Company on file in the Office of ____________.
Such Articles of Incorporation have not been amended, modified or rescinded
since their date of adoption and remain in full force and effect as of the date
hereof.
3. Attached hereto as EXHIBIT C is a true, correct and complete copy of the
Bylaws of the Company. Such Bylaws have not been amended, modified or rescinded
since their date of adoption and remain in full force and effect as of the date
hereof.
4. The persons named below now hold the offices set forth opposite their
names, and the signatures opposite their names and titles are their true and
correct signatures.
Name Office Signature
_____________ _________________ ____________________
_____________ _________________ ____________________
IN WITNESS WHEREOF, the Company has caused this Officer's Certificate to be duly
executed and delivered as of this _____ day of ___________, 1995.
FOUNDATION HEALTH MEDICAL SERVICES
<PAGE>
EXHIBIT A
BOARD RESOLUTIONS
<PAGE>
EXHIBIT B
ARTICLES OF INCORPORATION
<PAGE>
EXHIBIT C
BYLAWS
<PAGE>
EXHIBIT F
FIRST SECURITY BANK OF UTAH, N.A.
OFFICER'S CERTIFICATE
(Pursuant to Section 6.2(d) of the Participation Agreement)
_____________________, not individually (except with respect to paragraph 1
below, to the extent any such representations and warranties are made in its
individual capacity) but solely as owner trustee under the FH Trust 1995-1 (the
"Owner Trustee"), DOES HEREBY CERTIFY as follows:
(a) Each and every representation and warranty of the Owner Trustee contained
in the Operative Agreements to which it is a party is true and correct on
and as of the date hereof.
(b) Each Operative Agreement to which the Owner Trustee is a party is in full
force and effect with respect to it.
(c) The Owner Trustee has duly performed and complied with all covenants,
agreements and conditions contained in the Participation Agreement
(hereinafter defined) or in any Operative Agreement required to be
performed or complied with by it on or prior to the date hereof.
Capitalized terms used in this Officer's Certificate and not otherwise defined
herein have the respective meanings ascribed thereto in the Participation
Agreement dated as of __________ ___, 1995 among Foundation Health Medical
Services, as Lessee, Foundation Health Corporation, as Guarantor,
____________________ and ___________________, as Holders, First Security Bank of
Utah, N.A., as Owner Trustee and NationsBank of Texas, N.A., as the
Administrative Agent.
IN WITNESS WHEREOF, the Owner Trustee has caused this Officer's Certificate to
be duly executed and delivered as of this _____ day of __________ 1995.
____________, not individually, except as
expressly stated herein, but solely as Owner
Trustee under the FH Trust 1995-1
By:
---------------------
Name:
-------------------
Title:
------------------
<PAGE>
EXHIBIT G
FIRST SECURITY BANK OF UTAH, N.A.
OFFICER'S CERTIFICATE
(Pursuant to Section 6.2(e) of the Participation Agreement)
______________, a ___________ corporation (the
"Owner Trustee") DOES HEREBY CERTIFY as follows:
1. Attached hereto as EXHIBIT A is a true, correct and complete copy of the
resolutions of the Board of Directors of the Owner Trustee duly adopted by the
Board of Directors of the Owner Trustee on __________. Such resolutions have
not been amended, modified or rescinded since their date of adoption and remain
in full force and effect as of the date hereof.
2. Attached hereto as EXHIBIT B is a true, correct and complete copy of the
Articles of Incorporation of the Owner Trustee on file in the Office of
____________. Such Articles of Incorporation have not been amended, modified or
rescinded since their date of adoption and remain in full force and effect as of
the date hereof.
3. Attached hereto as EXHIBIT C is a true, correct and complete copy of the
Bylaws of the Owner Trustee. Such Bylaws have not been amended, modified or
rescinded since their date of adoption and remain in full force and effect as of
the date hereof.
4. The persons named below now hold the offices set forth opposite their
names, and the signatures opposite their names and titles are their true and
correct signatures.
Name Office Signature
_____________ _________________ ____________________
_____________ _________________ ____________________
IN WITNESS WHEREOF, the Owner Trustee has caused this Officer's Certificate to
be duly executed and delivered as of this _____ day of __________ 1995.
FIRST SECURITY BANK OF UTAH, N.A.
By:
---------------------
Name:
-------------------
Title:
------------------
<PAGE>
EXHIBIT A
BOARD RESOLUTIONS
<PAGE>
EXHIBIT B
ARTICLES OF INCORPORATION
<PAGE>
EXHIBIT C
BYLAWS
<PAGE>
EXHIBIT H
[Owner Trustee's Outside Counsel Opinion]
(Pursuant to Section 6.2(f) of the
Participation Agreement)
__________ __, 1995
TO THOSE ON THE ATTACHED DISTRIBUTION LIST
RE: TRUST AGREEMENT DATED AS OF __________ ___, 1995
Dear Sirs:
We have acted as special counsel for First Security Bank of Utah, N.A., a
national banking association, in its individual capacity ("FSB") and in its
capacity as trustee (the "Owner Trustee") under the Trust Agreement dated as of
___________ ___, 1995 (the "Trust Agreement") by and among it, NationsBank of
Texas, N.A. (the "Beneficiary"), in connection with the execution and delivery
by the Owner Trustee of the Operative Agreements to which it is a party. Except
as otherwise defined herein, the terms used herein shall have the meanings set
forth in Appendix A to the Participation Agreement dated as of __________ ___,
1995 (the "Participation Agreement") by and among Foundation Health Medical
Services, Foundation Health Corporation, __________________ and
_____________________, as Holders, First Security Bank of Utah, N.A., in its
individual capacity as expressly set forth therein and otherwise as Owner
Trustee and NationsBank of Texas, N.A., as Administrative Agent.
We have examined originals or copies, certified or otherwise identified to our
satisfaction, of such documents, corporate records and other instruments as we
have deemed necessary or advisable for the purpose of rendering this opinion.
Based upon the foregoing, we are of the opinion that:
1. FSB is a national banking association duly organized, validly existing
and in good standing under the laws of United States of America and each of
FSB and the Owner Trustee has under the laws of the State of Utah and
federal banking law the power and authority to enter into and perform its
obligations under the Trust Agreement and each other Operative Agreement to
which it is a party.
2. The Owner Trustee is the duly-appointed trustee under the Trust
Agreement.
3. The Trust Agreement has been duly authorized, executed and delivered
by one of the officers of FSB and, assuming due authorization, execution
and delivery by the beneficiary, is a legal, valid and binding obligation
of the Owner Trustee (and to the extent set forth therein, against FSB),
enforceable against the Owner Trustee (and to the extent set forth therein,
against FSB) in accordance with its terms, and the Trust Agreement creates
under the laws of the State of Utah for the Beneficiary the beneficial
interest in the Trust Estate it purports to create and is a valid trust
under the laws of the State of Utah.
4. The Operative Agreements to which it is party have been duly
authorized, executed and delivered by FSB, and, assuming due authorization,
execution and delivery by the other parties thereto, are legal, valid and
binding obligations of FSB, enforceable against FSB in accordance with
their respective terms.
5. The Operative Agreements to which it is party have been duly
authorized, executed and delivered by the Owner Trustee, and, assuming due
authorization, execution and delivery by the other parties thereto, are
legal, valid and binding obligations of the Owner Trustee, enforceable
against the Owner Trustee in accordance with their respective terms. The
Notes and the Certificates have been duly issued, executed and delivered by
the Owner Trustee, pursuant to authorization contained in the Trust
Agreement, and the Certificates are entitled to the benefits and security
afforded by the Trust Agreement in accordance with its terms and the terms
of the Trust Agreement.
<PAGE>
6. The execution and delivery by each of FSB and the Owner Trustee of the
Trust Agreement and the Operative Agreements to which it is a party, and
compliance by FSB or Owner Trustee, as the case may be, with all of the
provisions thereof do not and will not contravene any Laws applicable to or
binding on FSB, or as Owner Trustee, or contravene the provisions of, or
constitute a default under, its charter documents or by-laws or, to our
knowledge after due inquiry, any indenture, mortgage contract or other
agreement or instrument to which FSB or Owner Trustee is a party or by
which it or any of its property may be bound or affected.
7. The execution and delivery of the Operative Agreements by each of FSB
and the Owner Trustee and the performance by each of FSB and the Owner
Trustee of their respective obligations thereunder does not require on or
prior to the date hereof the consent or approval of, the giving of notice
to, the registration or filing with, or the taking of any action in respect
of any Governmental Authority or any court.
8. Assuming that the trust created by the Trust Agreement is treated as a
grantor trust for federal income tax purposed within the contemplation of
Section 671 through 678 of the Internal Revenue Code of 1986, there are no
fees, taxes, or other charges (except taxes imposed on fees payable to the
Owner Trustee) payable to the State of Utah or any political subdivision
thereof in connection with the execution, delivery or performance by the
Owner Trustee, the Agent, the Lenders, the Lessee or the Holder, as the
case may be, of the Operative Agreements or in connection with the
acquisition of any Property by the Owner Trustee or in connection with the
making by the Holder of its investment in the Trust or its acquisition of
the beneficial interest in the Trust Estate or in connection with the
issuance and acquisition of the Certificate, or the Notes, and neither the
Owner Trustee, the Trust Estate nor the trust created by the Trust
Agreement will be subject to any fee, tax or other governmental charge
(except taxes on fees payable to the Owner Trustee) under the laws of the
State of Utah or any political subdivision thereof on, based on or measured
by, directly or indirectly, the gross receipts, net income or value of the
Trust Estate by reason of the creation or continued existence of the trust
under the terms of the Trust Agreement pursuant to the laws of the State of
Utah or the Owner Trustee's performance of its duties under the Trust
Agreement.
9. There is no fee, tax or other governmental charge under the laws of
the State of Utah or any political subdivision thereof in existence on the
date hereof on, based on or measured by any payments under the
Certificates, Notes or the beneficial interests in the Trust Estate, by
reason of the creation of the trust under the Trust Agreement pursuant to
the laws of the State of Utah or the Owner Trustee's performance of its
duties under the Trust Agreement within the State of Utah.
10. Upon the filing of the financing statement on form UCC-1 in the form
attached hereto as Exhibit A with the _____________, the Administrative
Agent's security interest in the Trust Estate, for the benefit of the
Lenders, will be perfected, to the extent that such perfection is governed
by Article 9 of the Uniform Commercial Code as in effect in the State of
Utah (the "Utah UCC").
Your attention is directed to the Utah UCC, which provides, in part, that a
filed financing statement which does not state a maturity date or which states a
maturity date of more than five years is effective only for a period of five
years from the date of filing, unless within six months prior to the expiration
of said period a continuation statement is filed in the same office or offices
in which the original statement was filed. The continuation statement must be
signed by the secured party, identify the original statement by file number and
state that the original statement is still effective. Upon the timely filing of
a continuation statement, the effectiveness of the original financing statement
is continued for five years after the last date to which the original statement
was effective. Succeeding continuation statements may be filed in the same
manner to continue the effectiveness of the original statement.
The opinions set forth in paragraphs 3 and 4 above are subject to the
qualification that enforceability of the Trust Agreement and the other Operative
Agreements to which the Owner Trustee is a party, in accordance with their
respective terms, may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting enforcement of creditors' rights generally.
<PAGE>
We are attorneys admitted to practice in the State of Utah and in rendering the
foregoing opinions we have not passed upon, or purported to pass upon, the laws
of any jurisdictions other than the State of Utah and the federal banking law
governing the banking and trust powers of FSB.
Very truly yours,
[NAME OF OWNER TRUSTEE'S OUTSIDE COUNSEL]
<PAGE>
DISTRIBUTION LIST
NationsBank of Texas, N.A., as Administrative Agent
Foundation Health Medical Services
Foundation Health Corporation
_______________________, as a Holder
_______________________, as a Holder
First Security Bank of Utah, N.A., not individually, but solely as Owner Trustee
under the FH Trust 1995-1
<PAGE>
Appendix A
Rules of Usage and Definitions
1. Rules of Usage
The following rules of usage shall apply to this Appendix A and the Operative
Agreements (and each appendix, schedule, exhibit and annex to the foregoing)
unless otherwise required by the context or unless otherwise defined therein:
(a) Except as otherwise expressly provided, any definitions set forth
herein or in any other document shall be equally applicable to the singular
and plural forms of the terms defined.
(b) Except as otherwise expressly provided, references in any
document to articles, sections, paragraphs, clauses, annexes, appendices,
schedules or exhibits are references to articles, sections, paragraphs,
clauses, annexes, appendices, schedules or exhibits in or to such document.
(c) The headings, subheadings and table of contents used in any
document are solely for convenience of reference and shall not constitute a
part of any such document nor shall they affect the meaning, construction
or effect of any provision thereof.
(d) References to any Person shall include such Person, its
successors and permitted assigns and transferees.
(e) Except as otherwise expressly provided, reference to any
agreement means such agreement as amended, modified, extended,
supplemented, restated and/or replaced from time to time in accordance with
the applicable provisions thereof.
(f) Except as otherwise expressly provided, references to any law
includes any amendment or modification to such law and any rules or
regulations issued thereunder or any law enacted in substitution or
replacement therefor.
(g) When used in any document, words such as "hereunder", "hereto",
"hereof" and "herein" and other words of like import shall, unless the
context clearly indicates to the contrary, refer to the whole of the
applicable document and not to any particular article, section, subsection,
paragraph or clause thereof.
(h) References to "including" means including without limiting the
generality of any description preceding such term and for purposes hereof
the rule of ejusdem generis shall not be applicable to limit a general
statement, followed by or referable to an enumeration of specific matters,
to matters similar to those specifically mentioned.
(i) Each of the parties to the Operative Agreements and their counsel
have reviewed and revised, or requested revisions to, the Operative
Agreements, and the usual rule of construction that any ambiguities are to
be resolved against the drafting party shall be inapplicable in the
construing and interpretation of the Operative Agreements and any
amendments or exhibits thereto.
<PAGE>
2. Definitions
"Supplemental Rent" shall mean all amounts, liabilities and obligations
(other than Basic Rent) which the Lessee assumes or agrees to pay to Lessor, the
Holders, the Administrative Agent or any other Person under the Lease or under
any of the other Operative Agreements including, without limitation, payments of
Purchase Option Price, Termination Value and the Maximum Residual Guarantee
Amount and all indemnification amounts, liabilities and obligations. "ABR"
shall have the meaning specified in Section 1.1 of the Credit Agreement.
"acquire" or "purchase" shall mean, with respect to any Property, the
acquisition or purchase of such Property by the Owner Trustee from any Person.
"Acceleration" shall have the meaning specified in Section 1.1 of the
Credit Agreement.
"Acquisition Advance" shall mean an advance of funds to pay Property
Acquisition Costs pursuant to Section 5.3 of the Participation Agreement.
"Advance" shall mean a Construction Advance or an Acquisition Advance.
"Affiliate" shall have the meaning specified in Section 1.1 of the Credit
Agreement.
"After Tax Basis" shall mean, with respect to any payment to be received,
the amount of such payment increased or decreased so that, after deduction of
the amount of all taxes required to be paid by the recipient calculated at the
then maximum marginal rates generally applicable to Persons of the same type as
the recipients (less any tax savings realized as a result of the payment of the
indemnified amount and the item which gives rise to the indemnification
obligation) with respect to the receipt by the recipient of such amounts, such
increased or decreased payment (as so reduced) is equal to the payment otherwise
required to be made.
"Agency Agreement" shall mean the Agency Agreement, dated as of the Initial
Closing Date, between the Construction Agent and the Owner Trustee.
"Agency Agreement Event of Default" shall mean an "Event of Default" as
defined in Section 5.1 of the Agency Agreement.
"Agent" or "Administrative Agent" shall mean NationsBank of Texas, N.A., as
Administrative Agent for the Lenders pursuant to the Credit Agreement, or any
successor agent appointed in accordance with the terms of the Credit Agreement.
"Allocated Interest" shall have the meaning specified in Section 1.1 of the
Credit Agreement.
"Allocated Return" with respect to any Construction Period Property for
which the Basic Term has not commenced shall mean, as of any Scheduled Interest
Payment Date, the amount of Holder Yield due and payable on such date with
respect to a portion of the Holder Advances (which portion shall be designated
by the Owner Trustee by written notice to the Holders) having an aggregate
stated amount equal to the Holder Construction Property Cost of such Property as
of such date.
<PAGE>
"Applicable Margin" shall have the meaning given such term in Section 1.1
of the Credit Agreement.
"Appraisal" shall mean, with respect to any Property a limited appraisal in
summary format to be delivered in connection with Section 5.6 of the
Participation Agreement or in accordance with the terms of Section 10.1(e) of
the Lease, which Appraisal shall, in each case (i) be prepared by a reputable
MAI appraiser reasonably acceptable to the Agent, (ii) be prepared using the
income approach and the cost approach to determine the appraised value of the
applicable Property (based on the intended use of such Property) and using an
appraisal methodology based on usual comparative data collection and conceptual
analyses employed in more extensive narrative appraisals, and (iii) in the
judgment of counsel to the Agent, comply with all of the provisions of the
Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended,
the rules and regulations adopted pursuant thereto, and all other applicable
Legal Requirements.
"Appraisal Procedure" shall have the meaning given such term in Section
22.4 of the Lease.
"Approved State" shall mean California, Texas, Arizona and any other state
located in the United States in which the Guarantor or any of its Subsidiaries
operates or intends to operate a Medical Facility.
"Appurtenant Rights" shall mean (i) all agreements, easements, rights of
way or use, rights of ingress or egress, privileges, appurtenances, tenements,
hereditaments and other rights and benefits at any time belonging or pertaining
to the Land underlying any Improvements, or the Improvements, including, without
limitation, the use of any streets, ways, alleys, vaults or strips of land
adjoining, abutting, adjacent or contiguous to the Land and (ii) all permits,
licenses and rights, whether or not of record, appurtenant to such Land.
"Available Commitment" shall have the meaning specified in Section 1.1 of
the Credit Agreement.
"Available Holder Commitments" shall mean an amount equal to the excess, if
any, of (i) the amount of the Holder Commitments over (ii) the aggregate amount
of the Holder Advances made since the Initial Closing Date minus Holder Advances
repaid or prepaid as a result of the purchase by the Construction Agent of a
Construction Period Property pursuant to the terms of Section 6.3 of the Agency
Agreement (but without giving effect to any other repayments of any Holder
Advances).
"Average Eurodollar Margin" shall have the meaning specified in Section 1.1
of the Credit Agreement.
"Basic Rent" shall mean, the sum of (i) the Loan Basic Rent and (ii) the
Lessor Basic Rent, calculated as of the applicable date on which Basic Rent is
due.
"Basic Term" shall have the meaning specified in Section 2.2(a) of the
Lease.
"Basic Term Commencement Date" shall have the meaning specified in Section
2.2(a) of the Lease.
"Basic Term Expiration Date" shall have the meaning specified in Section
2.2(a) of the Lease.
"Best's" shall mean A.M. Best Company, Inc.
"Borrowing Date" shall have the meaning specified in Section 1.1 of the
Credit Agreement.
"Business Day" shall mean a day other than a Saturday, Sunday or other day
on which commercial banks in Sacramento, California or Dallas, Texas, are
authorized or required by law to close; PROVIDED, HOWEVER, that when used in
connection with a Loan bearing interest based on the Eurodollar Rate, the term
"Business Day" shall also exclude any day on which banks are not open for
dealings in dollar deposits in the London interbank market.
<PAGE>
"Capital Lease" means any lease of property (whether real, personal or
mixed) which is, in accordance with GAAP, required to be classified and
accounted for on the books of the lessee as a capital lease.
"Casualty" shall mean any damage or destruction of all or any portion of a
Property as a result of a fire, earthquake or other casualty.
"CERCLA" shall mean the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, 42 U.S.C. Sections 9601 et seq., as amended by the
Superfund Amendments and Reauthorization Act of 1986.
"Certificate" shall mean a Certificate in favor of each Holder regarding
the Holder Commitment of such Holder issued pursuant to the terms and conditions
of the Trust Agreement in favor of each Holder.
"Certifying Party" shall have the meaning specified in Section 26.1 of the
Lease.
"Claims" shall mean any and all obligations, liabilities, losses, actions,
suits, penalties, claims, demands, costs and expenses (including, without
limitation, reasonable attorney's fees and expenses) of any nature whatsoever.
"Closing Date" shall mean the Initial Closing Date and each Property
Closing Date.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time, or any successor statute hereto.
"Collateral" shall have the meaning specified in Section 1.1 of the Credit
Agreement.
"Commitment" shall have the meaning defined in Section 1.1 of the Credit
Agreement.
"Commitment Fee Payment Date" shall mean the last day of each March, June,
September and December and the last day of the Commitment Period, or such
earlier date as the Commitments shall terminate as provided in the Credit
Agreement.
"Commitment Fee Rate" shall mean, with respect to the Commitments or the
Holder Commitments, a rate equal to 15 basis points (0.15%) per annum for the
Commitment Period.
"Commitment Period" shall mean the period from the Initial Closing Date to
and including the Construction Period Termination Date, or such earlier date as
the Commitments shall terminate as provided in the Credit Agreement.
"Completion" shall mean, with respect to a Property, such time as final
completion of the Improvements on such Property has been achieved in accordance
with the Plans and Specifications, the Agency Agreement and/or the Lease, and in
compliance with all material Legal Requirements and Insurance Requirements and a
certificate of occupancy has been issued with respect to such Property by, and
certificate of completion recorded with, the appropriate governmental entity.
"Completion Date" shall mean, with respect to a Property, the earlier of
(i) the date on which Completion for such Property has occurred and (ii) the
Construction Period Termination Date.
"Condemnation" shall mean any taking or sale of the use, access, occupancy,
easement rights or title to any Property or any part thereof, wholly or
partially (temporarily or permanently), by or on account of any actual or
threatened eminent domain proceeding or other taking of action by any Person
having the power of eminent domain, including an action by a Governmental
Authority to change the grade of, or widen the streets adjacent to, any Property
or alter the pedestrian or vehicular traffic flow to any Property so as to
result in a change in access to such Property, or by or on account of an
eviction by paramount title or any transfer made in lieu of any such proceeding
or action.
"Construction Advance" shall mean an advance of funds to pay Property Costs
pursuant to Section 5.4 or 5.5 of the Participation Agreement.
"Construction Agent" shall mean Foundation Health Medical Services, a
California corporation, as construction agent under the Agency Agreement.
<PAGE>
"Construction Budget" shall mean the cost of constructing and developing
any Improvements as determined by the Construction Agent in its reasonable, good
faith judgment.
"Construction Commencement Date" shall mean, with respect to Improvements,
the date on which construction of such Improvements commences pursuant to the
Agency Agreement.
"Construction Period" shall mean, with respect to a Property, the period
commencing on the Construction Commencement Date for such Property and ending on
the Completion Date for such Property.
"Construction Period Termination Date" shall mean May 25, 1997, as such
date may be extended to November 25, 1997 in accordance with the terms of
Section 10.6 of the Participation Agreement.
"Construction Period Property" shall have the meaning specified in Section
1.1 of the Credit Agreement.
"Co-Owner Trustee" shall have the meaning specified in Section 9.2 of the
Trust Agreement.
"Credit Agreement" shall mean the Credit Agreement, dated as of the Initial
Closing Date, among the Lessor, the Agent and the Lenders, as specified therein.
"Credit Agreement Default" shall mean any event or condition which, with
the lapse of time or the giving of notice, or both, would constitute a Credit
Agreement Event of Default.
"Credit Agreement Event of Default" shall mean any event or condition
defined as an "Event of Default" in Section 6 of the Credit Agreement.
"Credit Documents" shall have the meaning specified in Section 1.1 of the
Credit Agreement.
"Deed" shall mean a warranty deed regarding Land and/or Improvements in
form and substance satisfactory to the Owner Trustee and the Agent.
"Default" shall mean any event, act or condition which with notice or lapse
of time, or both, would constitute an Event of Default.
"Election Notice" shall have the meaning given to such term in Section 20.2
of the Lease.
"Employee Benefit Plan" or "Plan" shall mean an employee benefit plan
(within the meaning of Section 3(3) of ERISA, including any Multiemployer Plan),
or any "plan" as defined in Section 4975(e)(1) of the Code and as interpreted by
the Internal Revenue Service and the Department of Labor in rules, regulations,
releases or bulletins in effect on any Closing Date.
"Environmental Claims" shall mean any investigation, notice, violation,
demand, allegation, action, suit, injunction, judgment, order, consent decree,
penalty, fine, lien, proceeding, or claim (whether administrative, judicial, or
private in nature) arising (a) pursuant to, or in connection with, an actual or
alleged violation of, any Environmental law, (b) in connection with any
Hazardous Substance, (c) from any abatement, removal, remedial, corrective, or
other response action in connection with a Hazardous Material, Environmental
Law, or other order of a Tribunal or (d) from any actual or alleged damage,
injury, threat, or harm to health, safety, natural resources, or the
environment.
"Environmental Laws" shall mean any Law, permit, consent, approval,
license, award, or other authorization or requirement of any Tribunal relating
to emissions, discharges, releases, threatened releases of any Hazardous
Substance into ambient air, surface water, ground water, publicly owned
treatment works, septic system, or land, or otherwise relating to the handling,
storage, treatment, generation, use, or disposal of Hazardous Substances,
pollution or to the protection of health or the environment, including without
limitation CERCLA, the Resource Conservation and Recovery Act, 42 U.S.C. Section
6901, et seq., and state statutes analogous thereto.
"Environmental Violation" shall mean any activity, occurrence or condition
that violates or threatens (if the threat requires remediation under any
Environmental Law and is not remediated during any grace period allowed under
such Environmental Law) to violate or results in or threatens (if the threat
requires remediation under any Environmental Law and is not remediated during
any grace period allowed under such Environmental Law) to result in
noncompliance with any Environmental Law.
"Equipment" shall mean equipment, apparatus, furnishings and fittings
acquired using the proceeds of the Loans or the Holder Advances by the
Construction Agent, the Lessee or the Lessor as covered by a Requisition,
whether or not now or subsequently attached to, contained in or used or usable
in any way in connection with any operation of any Improvements or other
improvements to real property.
"Equipment Schedule" shall mean (a) each Equipment Schedule attached to the
applicable Requisition and (b) each Equipment Schedule attached to the
applicable Lease Supplement as Schedule I-A.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations promulgated and rulings issued
thereunder.
"ERISA Affiliate" shall have the meaning given to such term as the Guaranty
Agreement.
"Eurocurrency Reserve Requirements" shall have the meaning specified in
Section 1.1 of the Credit Agreement.
"Eurodollar Holder Advance" shall mean a Holder Advance bearing a Holder
Yield based on the Eurodollar Rate.
"Eurodollar Rate" shall have the meaning specified in Section 1.1 of the
Credit Agreement.
"Eurodollar Reserve Rate" shall have the meaning specified in Section 1.1
of the Credit Agreement.
"Event of Default" shall mean a Lease Event of Default, a Guaranty Event of
Default, an Agency Agreement Event of Default or a Credit Agreement Event of
Default.
"Excepted Payments" shall mean: (a) all indemnity payments (including
indemnity payments made pursuant to Section 13 of the Participation Agreement),
whether made by adjustment to Basic Rent or otherwise, to which the Owner
Trustee, any Holder or any of their respective Affiliates, agents, officers,
directors or employees is entitled;
<PAGE>
(b) any amounts (other than Basic Rent, Termination Value, or Purchase
Option Price) payable under any Operative Agreement to reimburse the Owner
Trustee, any Holder or any of their respective Affiliates (including the
reasonable expenses of the Owner Trustee, the Trust Company and the Holders
incurred in connection with any such payment) for performing or complying with
any of the obligations of the Lessee under and as permitted by any Operative
Agreement;
(c) any amount payable to a Holder by any transferee of such interest of a
Holder as the purchase price of such Holder's interest in the Trust Estate (or a
portion thereof);
(d) any insurance proceeds (or payments with respect to risks self-insured
or policy deductibles) under liability policies other than such proceeds or
payments payable to the Agent;
(e) any insurance proceeds under policies maintained by the Owner Trustee
or any Holder;
(f) Transaction Expenses or other amounts or expenses paid or payable to
or for the benefit of the Owner Trustee or any Holder;
(g) all right, title and interest of any Holder or the Owner Trustee to
any Property or any portion thereof or any other property to the extent any of
the foregoing has been released from the Liens of the Security Documents and the
Lease pursuant to the terms thereof;
(h) upon termination of the Credit Agreement pursuant to the terms
thereof, all remaining property covered by the Lease or Security Documents;
(i) all payments in respect of the Holder Yield;
(j) any payments in respect of interest to the extent attributable to
payments referred to in clauses (a) through (i) above; and
(k) any rights of either the Owner Trustee or Trust Company to demand,
collect, sue for or otherwise receive and enforce payment of any of the
foregoing amounts.
"Excepted Rights" shall mean the rights retained by the Owner Trustee
pursuant to Section 8.2(a)(i) of the Credit Agreement and all right, title and
interest of Owner Trustee in the Shared Rights.
"Excess Proceeds" shall mean the excess, if any, of the aggregate of all
awards, compensation or insurance proceeds payable in connection with a Casualty
or Condemnation over the Termination Value paid by the Lessee pursuant to the
Lease with respect to such Casualty or Condemnation.
"Existing Credit Agreement" shall have the meaning given to such term in
the Guaranty Agreement.
"Expiration Date" shall mean the Basic Term Expiration Date or the last day
of any Extended Term, if applicable.
"Expiration Date Purchase Option" shall mean the Lessee's option to
purchase all (but not less than all) of the Properties on the Expiration Date.
"Extended Term" shall mean the five periods each of one year's duration
which immediately follow the end of the Basic Term with respect to which Lessee
has exercised its Renewal Option pursuant to Section 21.1 of the Lease.
"Eurodollar Margin Increase" shall have the meaning given to such term in
the Credit Agreement.
"Fair Market Sales Value" shall mean, with respect to any Property, the
amount, which in any event, shall not be less than zero, that would be paid in
cash in an arms-length transaction between an informed and willing purchaser and
an informed and willing seller, neither of whom is under any compulsion to
purchase or sell, respectively, such Property. Fair Market Sales Value of any
Property shall be determined based on the assumption that, except for purposes
of Section 17 of the Lease, such Property is in the condition and state of
repair required under Section 10.1 of the Lease and the Lessee are in compliance
with the other requirements of the Operative Agreements.
"FH Trust 1995-1" shall mean the grantor trust created pursuant to the
terms and conditions of the Trust Agreement.
"Fixtures" shall mean all fixtures relating to the Improvements, including
all components thereof, located in or on the Improvements, together with all
replacements, modifications, alterations and additions thereto.
"Force Majeure Event" shall mean any event beyond the control of the
Construction Agent, other than a Casualty or Condemnation, including, but not
limited to, strikes, lockouts, adverse soil conditions, acts of God, adverse
weather conditions, inability to obtain labor or materials, governmental
activities, civil commotion and enemy action; but excluding any event, cause or
condition that results from the Construction Agent's financial condition.
"GAAP" shall have the meaning given to such term in the Existing Credit
Agreement.
"Governmental Action" shall mean all permits, authorizations,
registrations, consents, approvals, waivers, exceptions, variances, orders,
judgments, written interpretations, decrees, licenses, exemptions, publications,
filings, notices to and declarations of or with, or required by, any
Governmental Authority, or required by any Legal Requirement, and shall include,
without limitation, all environmental and operating permits and licenses that
are required for the full use, occupancy, zoning and operating of any Property.
<PAGE>
"Governmental Authority" shall mean any nation or government, any state or
other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"Guarantor" shall mean Foundation Health Corporation, a Delaware
corporation.
"Guarantor Revolving Credit Facility" shall have the meaning specified in
Section 1.1 of the Credit Agreement.
"Guaranty Agreement" shall mean the Guaranty Agreement dated as of the date
hereof pursuant to which the Guarantor guarantees the obligations of the Lessee
under the Lease and the obligations of the Construction Agent under the
Construction Agency Agreement.
"Guaranty Default" shall mean any event or condition which, with the lapse
of time or the giving of notice, or both, would constitute a Guaranty Event of
Default.
"Guaranty Event of Default" shall mean an Event of Default as defined in
Section 2.05 of the Guaranty Agreement.
"Hazardous Substance" shall mean any of the following: (i) any petroleum
or petroleum product, explosives, radioactive materials, asbestos, formaldehyde,
polychlorinated biphenyls, lead and radon gas; (ii) any substance, material,
product, derivative, compound or mixture, mineral, chemical, waste, gas, medical
waste, or pollutant, in each case whether naturally occurring, man-made or the
by-product of any process, that is toxic, harmful or hazardous to the
environment or human health or safety as determined in accordance with any
Environmental Law; or (iii) any substance, material, product, derivative,
compound or mixture, mineral, chemical, waste, gas, medical waste or pollutant
that would support the assertion of any claim under any Environmental Law,
whether or not defined as hazardous as such under any Environmental Law.
"Holder Advance" shall mean any advance made by any Holder to the Owner
Trustee pursuant to the terms of the Trust Agreement or the Participation
Agreement.
"Holder Amount" shall mean as of any date, the aggregate amount of Holder
Advances made by each Holder to the Trust Estate pursuant to Section 2 of the
Participation Agreement and Section 3.1 of the Trust Agreement less any payments
of any Holder Advances received by the Holders pursuant to Section 3.4 of the
Trust Agreement.
"Holder Applicable Margin" shall mean the sum of (a) .93%, plus (b) the
Eurodollar Margin Increase.
"Holder Commitment Fee" shall have the meaning specified in Section 9.4(b)
of the Participation Agreement.
"Holder Commitments" shall mean $1,800,000, provided, that the Holder
Commitment of each Holder shall mean $600,000.
"Holder Construction Property Cost" shall mean, with respect to each
Construction Period Property for which the Basic Term has not commenced, at any
date of determination, an amount equal to the outstanding Holder Advances made
with respect thereto under Section 3.1(a) and (c) of the Trust Agreement.
"Holder Overdue Rate" shall mean the lesser of (i) the ABR plus two and
one-half percent (2 1/2%) and (ii) the highest rate permitted by applicable law.
"Holder Property Cost" shall mean with respect to a Property an amount
equal to the outstanding Holder Advances with respect thereto.
"Holders" shall mean the several banks and other financial institutions
which are from time to time holders of Certificates in connection with the FH
Trust 1995-1.
"Holder Yield" shall mean the Eurodollar Reserve Rate plus the Holder
Applicable Margin; provided, however, (i) upon delivery of the notice described
in Section 3.7(c) of the Trust Agreement, the outstanding Holder Advances of
each Holder shall bear a yield at the ABR applicable from time to time from and
after the dates and during the periods specified in Section 3.7(c) of the Trust
Agreement, and (ii) upon the delivery by a Holder of the notice described in
Section 3.8(c) of the Trust Agreement, the Holder Advances of such Holder shall
bear a yield at the ABR applicable from time to time after the dates and during
the periods specified in Section 3.8(c) of the Trust Agreement.
"Impositions" shall mean any and all liabilities, losses, expenses, costs,
charges and Liens of any kind whatsoever for fees, taxes, levies, imposts,
duties, charges, assessments or foreign withholdings ("Taxes") and all interest,
additions to tax and penalties thereon, which at any time prior to, during or
with respect to the Term or in respect of any period for which the Lessee shall
be obligated to pay Supplemental Rent, may be levied, assessed or imposed by any
Governmental Authority upon or with respect to (a) any Property or the leasing,
financing, refinancing, demolition, construction, substitution, subleasing,
assignment, control, condition, occupancy, servicing, maintenance, repair,
ownership, possession, activity conducted on, delivery, insuring, use,
operation, improvement, transfer of title, return or other disposition of such
Property or any part thereof or interest therein; (b) the Notes or Certificates
or any part thereof or interest therein; or (c) the Operative Agreements, the
performance thereof, or any payment made or accrued pursuant thereto or
otherwise in connection with the transactions contemplated thereby.
<PAGE>
"Improvements" shall mean, with respect to the construction, renovation
and/or Modification of a Medical Facility, all buildings, structures, Fixtures,
and other improvements of every kind existing at any time and from time to time
on or under the Land purchased, leased or otherwise acquired using the proceeds
of the Loans or the Holder Advances, together with any and all appurtenances to
such buildings, structures or improvements, including sidewalks, utility pipes,
conduits and lines, parking areas and roadways, and including all Modifications
and other additions to or changes in the Improvements at any time, including
without limitation (a) any Improvements existing as of the Property Closing Date
as such Improvements may be referenced on the applicable Requisition and (b) any
Improvements made subsequent to such Property Closing Date.
"Indebtedness" shall have the meaning specified in Section 1.1 of the
Credit Agreement.
"Indemnified Person" shall mean the Lessor, the Owner Trustee, in its
individual and its trust capacity, the Agent, the Holders, the Lenders and their
respective successors, assigns, directors, shareholders, partners, officers,
employees, agents and Affiliates.
"Indemnity Provider" shall mean each of (i) Foundation Health Medical
Services, a California corporation and (ii) Foundation Health Corporation, a
Delaware corporation, with such entities acting on a joint and several basis.
"Initial Closing Date" shall mean the date of the Participation Agreement.
"Initial Construction Advance" shall mean any initial Advance to pay for:
(i) Property Costs for construction of any Improvements; and (ii) the Property
Costs of restoring or repairing any Property which is required to be restored or
repaired in accordance with Section 15.1(e) of the Lease.
"Insurance Company" shall mean an organization licensed under the Insurance
Regulations to conduct insurance operations (or an organization required to be
licensed as such).
"Insurance Regulation" means any Law applicable to an Insurance Company as
such.
"Insurance Regulator" means any Person charged with the administration,
oversight or enforcement of any Insurance Regulation.
"Insurance Requirements" shall mean all terms and conditions of any
insurance policy either required by the Lease to be maintained by the Lessee or
required by the Agency Agreement to be maintained by the Construction Agent, and
all requirements of the issuer of any such policy and, regarding self insurance,
any other requirements of Lessee.
"Insurance Subsidiary" means any Subsidiary of the Guarantor that is an
Insurance Company at the time of determination.
"Interest Period" shall have the meaning specified in Section 1.1 of the
Credit Agreement.
"Investment Company Act" shall mean the Investment Company Act of 1940, as
amended, together with the rules and regulations promulgated thereunder.
"Land" shall mean a parcel of real property described on (a) the
Requisition issued by the Construction Agent on the Property Closing Date
relating to such parcel and (b) Schedule I-C to each applicable Lease Supplement
executed and delivered in accordance with the requirements of Section 2.4 of the
Lease.
"Law" shall mean any statute, law, ordinance, regulation, rule, directive,
order, writ, injunction or decree of any Tribunal.
"Lease" or "Lease Agreement" shall mean the Lease Agreement (Tax Retention
Operating Lease) dated as of the Initial Closing Date, between the Lessor and
the Lessee, together with any Lease Supplements thereto, as such Lease Agreement
may from time to time be supplemented, amended or modified in accordance with
the terms thereof.
"Lease Default" shall mean any event or condition which, with the lapse of
time or the giving of notice, or both, would constitute a Lease Event of
Default.
"Lease Event of Default" shall have the meaning specified in Section 17.1
of the Lease.
"Lease Supplement" shall mean each Lease Supplement substantially in the
form of Exhibit A to the Lease, together with all attachments and schedules
thereto, as such Lease Supplement may be supplemented, amended or modified from
time to time.
"Legal Requirements" shall mean all foreign, Federal, state, county,
municipal and other governmental statutes, laws, rules, orders, regulations,
ordinances, judgments, decrees and injunctions affecting the Owner Trustee, the
Holders, the Agent, any Lender or any Improvements or the taxation, demolition,
construction, use or alteration of such Improvements, whether now or hereafter
enacted and in force, including any that require repairs, modifications or
alterations in or to any Property or in any way limit the use and enjoyment
thereof (including all building, zoning and fire codes and the Americans with
Disabilities Act of 1990, 42 U.S.C. Section 12101 et. seq., and any other
similar Federal, state or local laws or ordinances and the regulations
promulgated thereunder) and any that may relate to environmental requirements
(including all Environmental Laws), and all permits, certificates of occupancy,
licenses, authorizations and regulations relating thereto, and all covenants,
agreements, restrictions and encumbrances contained in any instruments which are
either of record or known to the Lessee affecting any Property or the
Appurtenant Rights.
"Lender Commitment Fee" shall have the meaning specified in Section 9.4(a)
of the Participation Agreement.
"Lender Financing Statements" shall mean UCC financing statements and
fixture filings appropriately completed and executed for filing in the
applicable jurisdiction in order to procure a security interest in favor of the
Agent in any Equipment or in any Improvements.
"Lenders" shall mean the several banks and other financial institutions
from time to time party to the Credit Agreement.
"Lessee" shall have the meaning set forth in the Lease.
"Lessor" shall mean the Owner Trustee, not in its individual capacity, but
as Lessor under the Lease.
"Lessor Basic Rent" shall mean the scheduled Holder Yield due on the Holder
Advances on any Specified Interest Payment Date pursuant to the Trust Agreement
(but not including (i) any such scheduled Holder Yield due on the Holder
Advances prior to the Basic Term Commencement Date with respect to the Property
to which such Holder Advances relate or (ii) overdue amounts under the Trust
Agreement or otherwise).
"Lessor Financing Statements" shall mean UCC financing statements and
fixture filings appropriately completed and executed for filing in the
applicable jurisdictions in order to protect the Lessor's interest under the
Lease to the extent the Lease is a security agreement or a mortgage.
"Lessor Lien" shall mean any Lien, true lease or sublease or disposition of
title arising as a result of (a) any claim against the Lessor or Trust Company,
in its individual capacity, not resulting from the transactions contemplated by
the Operative Agreements, (b) any act or omission of the Lessor or Trust
Company, in its individual capacity, which is not required by the Operative
Agreements or is in violation of any of the terms of the Operative Agreements,
(c) any claim against the Lessor or Trust Company, in its individual capacity,
with respect to Taxes or Transaction Expenses against which the Lessee is not
required to indemnify Lessor or Trust Company, in its individual capacity,
pursuant to Section 13 of the Participation Agreement or (d) any claim against
the Lessor arising out of any transfer by the Lessor of all or any portion of
the interest of the Lessor in the Properties, the Trust Estate or the Operative
Agreements other than the transfer of title to or possession of any Properties
by the Lessor pursuant to and in accordance with the Lease, the Credit Agreement
or the Participation Agreement or pursuant to the exercise of the remedies set
forth in Article XVII of the Lease.
<PAGE>
"Lien" shall mean any mortgage, pledge, security interest, encumbrance,
lien, option or charge of any kind.
"Limited Recourse Amount" shall mean with respect to the Properties on an
aggregate basis, an amount equal to the sum of the Termination Values with
respect to all of the Properties on each Payment Date, less the Maximum Residual
Guarantee Amount as of such date with respect to the Properties.
"Loans" shall have the meaning specified in Section 2.1(a) of the Credit
Agreement.
"Loan Basic Rent" shall mean the interest due on the Loans on any Specified
Interest Payment Date pursuant to the Credit Agreement (but not including
interest on (i) any such Loan prior to the Basic Term Commencement Date with
respect to the Property to which such Loan relates or (ii) any overdue amounts
under Section 2.7(b) of the Credit Agreement or otherwise).
"Loan Property Cost" shall have the meaning specified in Section 1.1 of the
Credit Agreement.
"Majority Lenders" shall have the meaning specified in Section 1.1 of the
Credit Agreement.
"Marketing Period" shall mean, if the Lessee has given a Sale Notice in
accordance with Section 20.2 of the Lease, the period commencing on the date
such Sale Notice is given and ending on the anniversary date of the Initial
Closing Date next succeeding the date such Sale Note is given.
"Material Adverse Effect", for purposes of all the Operative Agreements,
shall mean a material adverse effect on (a) the business, condition (financial
or otherwise), assets, liabilities or operations of the Guarantor and its
Subsidiaries taken as a whole; provided, however, it is understood and agreed
that such Material Adverse Effect shall not be deemed to occur under this
subparagraph (a) unless the matter at issue will have a monetary effect in an
amount that, when added to other matters occurring during the fiscal year in
which such matter in question occurred, would cause a reduction of the Net Worth
of the Guarantor and its Subsidiaries during such fiscal year of ten percent
(10%) or more, (b) the ability of the Guarantor, the Lessee or any Subsidiary to
perform its respective obligations under any Operative Agreement to which it is
a party, (c) the validity or enforceability of any Operative Agreement or the
rights and remedies of the Agent, the Lenders, the Holders, or the Lessor
thereunder, (d) the validity, priority or enforceability of any Lien on any
Property created by any of the Operative Agreements, or (e) the value, utility
or useful life of any Property or the use, or ability of the applicable Lessee
to use, any Property for the purpose for which it was intended.
"Maturity Date" shall have the meaning specified in Section 1.1 of the
Credit Agreement.
"Maximum Property Cost" shall mean the aggregate amount of the Property
Costs for all Properties subject to the Lease as of the applicable determination
date.
"Maximum Residual Guarantee Amount" shall mean an amount equal to the
product of the aggregate Property Cost for all of the Properties times 87%.
"Medical Facility" shall mean (i) any real property location used by the
Lessee or any of its affiliates to provide health care, and (ii) any corporate
office facility used by the Lessee or any of its affiliates.
"Modifications" shall have the meaning specified in Section 11.1(a) of the
Lease.
"Moody's" shall have the meaning specified in Section 1.1 of the Credit
Agreement.
"Mortgage Instrument" shall mean any mortgage, deed of trust or any other
instrument executed by the Owner Trustee in favor of the Agent and evidencing a
Lien on a Property, in form and substance reasonably acceptable to the Agent.
"Multiemployer Plan" shall mean any plan described in Section 4001(a)(3) of
ERISA to which contributions are or have been made or required by the Lessee or
any of its Subsidiaries or ERISA Affiliates.
"Multiple Employer Plan" shall mean a plan to which the Lessee or any ERISA
Affiliate and at least one other employer other than an ERISA Affiliate is
making or accruing an obligation to make, or has made or accrued an obligation
to make, contributions.
"Net Proceeds" shall mean all amounts paid in connection with any Casualty
or Condemnation, and all interest earned thereon, less the expense of claiming
and collecting such amounts, including all costs and expenses in connection
therewith for which the Agent or Lessor are entitled to be reimbursed pursuant
to the Lease.
"Net Sale Proceeds Shortfall" shall mean the amount by which the proceeds
of a sale described in Section 22.1 of the Lease (net of all expenses of sale)
are less than the Limited Recourse Amount with respect to the Properties if it
has been determined that the Fair Market Sales Value of the Properties at the
expiration of the term of the Lease has been impaired by greater than expected
wear and tear during the Term of the Lease.
"Net Worth" shall have the meaning specified in Section 1.01 of the
Guaranty Agreement.
"Notes" shall have the meaning specified in Section 1.1 of the Credit
Agreement.
"Occupational Safety and Health Law" shall mean the Occupational Safety and
Health Act of 1970 and any other federal, state or local statute, law,
ordinance, code, rule, regulation, order or decree regulating or relating to, or
imposing liability or standards of conduct concerning, employee health and/or
safety, as now or at any time hereafter in effect.
"Officer's Certificate" shall mean a certificate signed by any individual
holding the office of vice president or higher, which certificate shall certify
as true and correct the subject matter being certified to in such certificate.
"Operative Agreements" shall mean the following: the Participation
Agreement, the Agency Agreement, the Trust Agreement, the Certificates, the
Credit Agreement, the Notes, the Guaranty Agreement, the Lease (and a memorandum
thereof in a form reasonably acceptable to the Agent), each Lease Supplement
(and a memorandum thereof in a form reasonably acceptable to the Agent), the
Security Agreement and each Mortgage Instrument.
"Overdue Rate" shall mean (i) with respect to Basic Rent, and any other
amount owed under or with respect to the Credit Agreement or the Security
Documents, the rate specified in Section 2.7(b) of the Credit Agreement, (ii)
with respect to Lessor Basic Rent, the Holder Yield and any other amount owed
under or with respect to the Trust Agreement, the applicable rate specified in
the Trust Agreement, and (iii) with respect to any other amount, the amount
referred to in clause (y) of Section 2.7(c) of the Credit Agreement.
<PAGE>
"Owner Trustee" shall mean First Security Bank of Utah, N.A., not
individually, except as expressly stated in the various Operative Agreements,
but solely as Owner Trustee under the FH Trust 1995-1, and any successor or
replacement Owner Trustee expressly permitted under the Operative Agreements.
"Participation Agreement" shall mean the Participation Agreement dated as
of May 25, 1995, among the Lessee, the Guarantor, the Owner Trustee, not in its
individual capacity except as expressly stated therein, the Holders and the
Agent, as such Participation Agreement may be amended, supplemented or otherwise
modified from time to time in accordance with the terms thereof or of any other
Operative Agreement.
"Payment Date" shall mean any Specified Interest Payment Date and any date
on which interest or Holder Yield in connection with a prepayment of principal
on the Loans or of the Holder Advances is due under the Credit Agreement or the
Trust Agreement.
"PBGC" shall mean the Pension Benefit Guaranty Corporation created by
Section 4002(a) of ERISA or any successor thereto.
"Pension Plan" means a "pension plan", as such term is defined in section
3(2) of ERISA, which is subject to title IV of ERISA (other than a Multiemployer
Plan), and to which the Company or any ERISA Affiliate may have any liability,
including any liability by reason of having been a substantial employer within
the meaning of section 4063 of ERISA at any time during the preceding five
years, or by reason of being deemed to be a contributing sponsor under section
4069 of ERISA.
"Permitted Exceptions" shall mean:
(i) Liens of the types described in clauses (i), (ii) and (v) of
the definition of Permitted Liens;
(ii) Liens for Taxes not yet due; and
(iii) all encumbrances, exceptions, restrictions, easements,
rights of way, servitudes, encroachments and irregularities in title, other
than Liens which, in the reasonable assessment of the Agent, do not
materially impair the use of the Property for its intended purpose.
"Permitted Liens" shall mean:
(i) the respective rights and interests of the parties to the
Operative Agreements as provided in the Operative Agreements;
(ii) the rights of any sublessee or assignee under a sublease or
an assignment expressly permitted by the terms of the Lease;
(iii) Liens for Taxes that either are not yet due or are
being contested in accordance with the provisions of Section 13.1 of the
Lease;
(iv) Liens arising by operation of law, materialmen's,
mechanics', workmen's, repairmen's, employees', carriers', warehousemen's
and other like Liens relating to the construction of the Improvements or in
connection with any Modifications or arising in the ordinary course of
business for amounts that either are not more than 30 days past due or are
being diligently contested in good faith by appropriate proceedings, so
long as such proceedings satisfy the conditions for the continuation of
proceedings to contest Taxes set forth in Section 13.1 of the Lease;
<PAGE>
(v) Liens of any of the types referred to in clause (iv) above
that have been bonded for not less than the full amount in dispute (or as
to which other security arrangements satisfactory to the Lessor and the
Agent have been made), which bonding (or arrangements) shall comply with
applicable Legal Requirements, and shall have effectively stayed any
execution or enforcement of such Liens;
(vi) Liens arising out of judgments or awards with respect to
which appeals or other proceedings for review are being prosecuted in good
faith and for the payment of which adequate reserves have been provided as
required by GAAP or other appropriate provisions have been made, so long as
such proceedings have the effect of staying the execution of such judgments
or awards and satisfy the conditions for the continuation of proceedings to
contest Taxes set forth in Section 13.1 of the Lease;
(vii) Liens in favor of municipalities to the extent agreed
to by the Lessor and Lessee; and
(viii) Permitted Exceptions.
"Person" shall mean any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization,
governmental authority or any other entity.
"Plans and Specifications" shall mean, with respect to Improvements, the
construction documents for such Improvements to be constructed or already
existing, as such construction documents may be amended, modified or
supplemented from time to time in accordance with the terms of the Participation
Agreement.
<PAGE>
"Prime Lending Rate" shall have the meaning specified in Section 1.1 of the
Credit Agreement.
"Property" shall mean, with respect to each Medical Facility that is
acquired, constructed and/or renovated pursuant to the terms of the Operative
Agreements, the Land and each item of Equipment and the various Improvements, in
each case located on such Land.
"Property Acquisition Cost" shall mean the cost to Lessor to purchase a
Property on a Property Closing Date.
"Property Closing Date" shall mean each date on which the Lessor purchases
a Property.
"Property Cost" shall mean with respect to a Property the aggregate amount
of the Loan Property Cost, plus the Holder Property Cost for such Property (as
such amounts shall be increased equally among all Properties respecting the
Holder Advances and the Loans extended from time to time to pay for the
Transaction Expenses, fees, expenses and other disbursements referenced in
Sections 9.1(a) and (b) of the Participation Agreement), it being specifically
understood and agreed that Property Cost shall include all amounts requested in
a Requisition submitted pursuant to the terms of this Participation Agreement
provided that such amount relates to the Property in question and is a cost that
can be capitalized with respect to such Property in accordance with GAAP
(including specifically without limitation any allocated overhead costs that may
be so capitalized).
"Purchase Option" shall have the meaning given to such term in Section 20.2
of the Lease.
"Release" shall mean any release, pumping, pouring, emptying, injecting,
escaping, leaching, dumping, seepage, spill, leek, flow, discharge, disposal or
emission of a Hazardous Substance.
"Renewal Option" shall have the meaning specified in Section 21.1 of the
Lease.
"Rent" shall mean, collectively, the Basic Rent and the Supplemental Rent,
in each case payable under the Lease.
"Reportable Event" shall have the meaning specified in ERISA.
"Requested Funds" shall mean any funds requested by the Lessee or the
Construction Agent, as applicable, in accordance with Section 5 of the
Participation Agreement.
"Requirement of Law" shall have the meaning specified in Section 1.1 of the
Credit Agreement.
"Requisition" shall have the meaning specified in Section 4.2 of the
Participation Agreement.
"Responsible Officer" shall mean the Chairman or Vice Chairman of the Board
of Directors, the Chairman or Vice Chairman of the Executive Committee of the
Board of Directors, the President, any Senior Vice President or Executive Vice
President, any Vice President, the Secretary, any Assistant Secretary, the
Treasurer, or any Assistant Treasurer, except that when used with respect to the
Trust Company or the Owner Trustee, "Responsible Officer" shall also include the
Cashier, any Assistant Cashier, any Trust Officer or Assistant Trust Officer,
the Controller and any Assistant Controller or any other officer of the Trust
Company or the Owner Trustee customarily performing functions similar to those
performed by any of the above designated officers and also means, with respect
to a particular corporate trust matter, any other officer to whom such matter is
referred because of his knowledge of and familiarity with the particular
subject.
"Sale Date" shall have the meaning given to such term in Section 22.1(a) of
the Lease.
"Sale Notice" shall mean a notice given to Lessor in connection with the
election by Lessee of its Sale Option.
<PAGE>
"Sale Option" shall have the meaning given to such term in Section 20.2 of
the Lease.
"Scheduled Interest Payment Date" shall have the meaning specified in
Section 1.1 of the Credit Agreement.
"Securities Act" shall mean the Securities Act of 1933, as amended,
together with the rules and regulations promulgated thereunder.
"Security Agreement" shall mean the Security Agreement, dated as of the
Initial Closing Date between the Owner Trustee and the Agent.
"Security Documents" shall have the meaning specified in Section 1.1 of the
Credit Agreement.
"Shared Rights" shall mean the rights retained by the Lessor, but not to
the exclusion of the Agent, pursuant to Section 8.2(a)(ii) of the Credit
Agreement.
"S&P" shall have the meaning specified in Section 1.1 of the Credit
Agreement.
"Specified Interest Payment Date" shall have the meaning specified in
Section 1.1 of the Credit Agreement.
"Subsidiary" shall have the meaning specified in Section 1.1 of the Credit
Agreement.
"Supplemental Rent" shall mean all amounts, liabilities and obligations
(other than Basic Rent) which the Lessee assumes or agrees to pay to Lessor, the
Holders, the Administrative Agent or any other Person under the Lease or under
any of the other Operative Agreements including, without limitation, payments of
Purchase Option Price, Termination Value and the Maximum Residual Guarantee
Amount and all indemnification amounts, liabilities and obligations.
"Taxes" shall have the meaning specified in the definition of Impositions.
"Term" shall mean the Basic Term and each Extended Term, if any.
"Termination Date" shall have the meaning specified in Section 16.2(a) of
the Lease.
"Termination Event" shall mean (a) with respect to any Plan, the occurrence
of a Reportable Event or an event described in Section 4062(e) of ERISA, (b) the
withdrawal of the Lessee or any ERISA Affiliate from a Multiple Employer Plan
during a plan year in which it was a substantial employer (as such term is
defined in Section 4001(a)(2) of ERISA), or the termination of a Multiple
Employer Plan, (c) the distribution of a notice of intent to terminate a Plan or
Multiemployer Plan pursuant to Section 4041(a)(2) or 4041A of ERISA, (d) the
institution of proceedings to terminate a Plan or Multiemployer Plan by the PBGC
under Section 4042 of ERISA, (e) any other event or condition which might
constitute grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Plan or Multiemployer Plan, or (f)
the complete or partial withdrawal of the Lessee or any ERISA Affiliate from a
Multiemployer Plan.
"Termination Notice" shall have the meaning specified in Section 16.1 of
the Lease.
"Termination Value" shall mean (a) with respect to all Properties, an
amount equal to the sum of (i) the aggregate outstanding principal and interest
balance on the Notes, plus (ii) the aggregate outstanding principal amount of
the Holder Advances plus the accrued and unpaid Holder Yield thereon, in each
case as of the applicable Payment Date and (b) with respect to a particular
Property, an amount equal to the product of the Termination Value of all the
Properties times a fraction, the numerator of which is the Property Cost
allocatable to the particular Property in question and the denominator of which
is the aggregate Property Cost for all the Properties.
<PAGE>
"Total Condemnation" shall mean a Condemnation that involves a taking of
Lessor's entire title to a Property.
"Transaction Expenses" shall mean all costs and expenses incurred in
connection with the preparation, execution and delivery of the Operative
Agreements and the transactions contemplated by the Operative Agreements
including without limitation:
(a) the reasonable fees, out-of-pocket expenses and disbursements of
counsel (other than counsel to the Lenders, the Agent or the Holders) in
negotiating the terms of the Operative Agreements and the other transaction
documents, preparing for the closings under, and rendering opinions in
connection with, such transactions and in rendering other services
customary for counsel representing parties to transactions of the types
involved in the transactions contemplated by the Operative Agreements;
(b) any and all other reasonable fees, charges or other amounts
payable to the Lenders, Agent, the Holders, the Owner Trustee or any broker
which arises under any of the Operative Agreements;
(c) any other reasonable fee, out-of-pocket expenses, disbursement or
cost of any party to the Operative Agreements or any of the other
transaction documents; and
(d) any and all Taxes and fees incurred in recording or filing any
Operative Agreement or any other transaction document, any deed,
declaration, mortgage, security agreement, notice or financing statement
with any public office, registry or governmental agency in connection with
the transactions contemplated by the Operative Agreement.
"Tribunal" shall mean any state, commonwealth, federal, foreign,
territorial, or other court or government body, subdivision agency, department,
commission, board, bureau or instrumentality of a governmental body.
"Trust Agreement" shall mean the Trust Agreement dated as of the Initial
Closing Date, between the Holders and the Owner Trustee.
"Trust Company" shall mean First Security Bank of Utah, N.A. in its
individual capacity, and any successor owner trustee under the Trust Agreement
in its individual capacity.
"Trust Estate" shall have the meaning specified in Section 2.2 of the Trust
Agreement.
"UCC Financing Statements" shall mean collectively the Lender Financing
Statements and the Lessor Financing Statements.
"Unfunded Amount" shall have the meaning specified in Section 3.2 of the
Agency Agreement.
"Uniform Commercial Code" and "UCC" shall mean the Uniform Commercial Code
as in effect in any applicable jurisdiction.
"Voting Power" shall mean, with respect to securities issued by any Person,
the combined voting power of all securities of such person which are issued and
outstanding at the time of determination and which are entitled to vote in the
election of directors or such Person, other than securities having such power
only by reason of the happening of a contingency.
"Withdrawal Liability" shall mean liability to a Multiemployer Plan as a
result of a complete or partial withdrawal from such Multiemployer Plan, as such
terms are defined in Part I of Subtitle E of Title IV of ERISA.
"Work" shall mean the furnishing of labor, materials, components,
furniture, furnishings, fixtures, appliances, machinery, equipment, tools,
power, water, fuel, lubricants, supplies, goods and/or services with respect to
any Property.
<PAGE>
EXHIBIT I
[Form of Limited Power of Attorney]
<PAGE>
- -------------------------------------------------------------------------------
LEASE AGREEMENT
(Tax Retention Operating Lease)
Dated as of May 25, 1995
between
FIRST SECURITY BANK OF UTAH, N.A.,
not individually,
but solely as Owner Trustee
under the FH Trust 1995-1,
as Lessor
and
FOUNDATION HEALTH MEDICAL SERVICES,
as Lessee
- -------------------------------------------------------------------------------
<PAGE>
This Lease Agreement is subject to a security interest in favor of NationsBank
of Texas, N.A., as Administrative Agent (the "Agent") under a Credit Agreement
dated as of May 25, 1995, among First Security Bank of Utah, N.A., not
individually except as expressly stated therein, but solely as Owner Trustee
under the FH Trust 1995-1, the Lenders and the Agent, as amended, modified,
supplemented, restated and/or replaced from time to time. This Lease Agreement
has been executed in several counterparts. To the extent, if any, that this
Lease Agreement constitutes chattel paper (as such term is defined in the
Uniform Commercial Code as in effect in any applicable jurisdiction), no
security interest in this Lease Agreement may be created through the transfer or
possession of any counterpart other than the original counterpart containing the
receipt therefor executed by the Agent on the signature page hereof.
<PAGE>
TABLE OF CONTENTS
ARTICLE I. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1 Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 Lease Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.3 Title. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.4 Lease Supplements. . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3.1 Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3.2 Payment of Basic Rent. . . . . . . . . . . . . . . . . . . . . . . . 3
3.3 Supplemental Rent. . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.4 Performance on a Non-Business Day. . . . . . . . . . . . . . . . . . 3
3.5 Rent Payment Provisions. . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4.1 Utility Charges. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
5.1 Quiet Enjoyment. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE VI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
6.1 Net Lease. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
6.2 No Termination or Abatement. . . . . . . . . . . . . . . . . . . . . 5
ARTICLE VII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
7.1 Ownership of the Property. . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE VIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
8.1 Condition of the Property. . . . . . . . . . . . . . . . . . . . . . 6
8.2 Possession and Use of the Property . . . . . . . . . . . . . . . . . 7
ARTICLE IX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
9.1 Compliance With Legal Requirements and Insurance Requirements. . . . 7
<PAGE>
ARTICLE X. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
10.1 Maintenance and Repair; Return; Appraisals . . . . . . . . . . . . . 8
10.2 Environmental Inspection . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE XI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
11.1 Modifications, Substitutions and Replacements. . . . . . . . . . . . 9
ARTICLE XII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
12.1 Warranty of Title. . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE XIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
13.1 Permitted Contests Other Than in Respect of Indemnities. . . . . . 11
ARTICLE XIV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
14.1 Public Liability and Workers' Compensation
Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
14.2 Hazard and Other Insurance . . . . . . . . . . . . . . . . . . . . 12
14.3 Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE XV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
15.1 Casualty and Condemnation. . . . . . . . . . . . . . . . . . . . . 14
15.2 Environmental Matters. . . . . . . . . . . . . . . . . . . . . . . 15
15.3 Notice of Environmental Matters. . . . . . . . . . . . . . . . . . 16
ARTICLE XVI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
16.1 Termination Upon Certain Events. . . . . . . . . . . . . . . . . . 16
16.2 Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE XVII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
17.1 Lease Events of Default. . . . . . . . . . . . . . . . . . . . . . 17
17.2 Surrender of Possession. . . . . . . . . . . . . . . . . . . . . . 19
17.3 Reletting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
17.4 Damages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
17.5 [intentionally omitted]. . . . . . . . . . . . . . . . . . . . . . 20
17.6 Final Liquidated Damages . . . . . . . . . . . . . . . . . . . . . 20
17.7 [Intentionally Omitted]. . . . . . . . . . . . . . . . . . . . . . 21
17.8 Waiver of Certain Rights . . . . . . . . . . . . . . . . . . . . . 21
17.9 Assignment of Rights Under Contracts . . . . . . . . . . . . . . . 21
17.10 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE XVIII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
18.1 Lessor's Right to Cure Lessee's Lease Defaults . . . . . . . . . . 21
ARTICLE XIX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
19.1 Provisions Relating to Lessee's Exercise of its Purchase Option. . 21
19.2 No Termination With Respect to Less than All of
a Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
<PAGE>
ARTICLE XX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
20.1 Individual Purchase Option . . . . . . . . . . . . . . . . . . . . 22
20.2 Anniversary Date Purchase or Sale Option . . . . . . . . . . . . . 23
20.3 Lessor's Transfer Option . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE XXI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
21.1 Renewal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE XXII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
22.1 Sale Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . 24
22.2 Application of Proceeds of Sale. . . . . . . . . . . . . . . . . . 26
22.3 Indemnity for Excessive Wear . . . . . . . . . . . . . . . . . . . 26
22.4 Appraisal Procedure. . . . . . . . . . . . . . . . . . . . . . . . 26
22.5 Certain Obligations Continue . . . . . . . . . . . . . . . . . . . 27
ARTICLE XXIII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
23.1 Holding Over . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ARTICLE XXIV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
24.1 Risk of Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE XXV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
25.1 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
25.2 Subleases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE XXVI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
26.1 No Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE XXVII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
27.1 Acceptance of Surrender. . . . . . . . . . . . . . . . . . . . . . 29
27.2 No Merger of Title . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE XXVIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
28.1 [Intentionally Omitted]. . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE XXIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
29.1 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE XXX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
30.1 Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . 31
30.2 Amendments and Modifications . . . . . . . . . . . . . . . . . . . 31
30.3 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . 31
30.4 Headings and Table of Contents . . . . . . . . . . . . . . . . . . 31
30.5 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
30.6 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . 31
30.7 Calculation of Rent. . . . . . . . . . . . . . . . . . . . . . . . 31
30.8 Memoranda of Lease and Lease Supplements . . . . . . . . . . . . . 31
30.9 Allocations between the Lenders and the Holders. . . . . . . . . . 31
30.10 Limitations on Recourse . . . . . . . . . . . . . . . . . . . 32
EXHIBITS
EXHIBIT A - Lease Supplement No. ___
EXHIBIT B - Other Names and Locations of Lessee
<PAGE>
LEASE AGREEMENT
(Tax Retention Operating Lease Agreement)
THIS LEASE AGREEMENT (Tax Retention Operating Lease) (this "LEASE"), dated
as of May 25, 1995, is between FIRST SECURITY BANK OF UTAH, N.A., a national
banking association, having its principal office at 79 South Main Street, Salt
Lake City, Utah 84111, not individually, but solely as Owner Trustee under the
FH Trust 1995-1, as lessor (the "LESSOR"), and FOUNDATION HEALTH MEDICAL
SERVICES, a California corporation, having its principal place of business at
3400 Data Drive, Rancho Cordova, California 95670, as lessee (the "LESSEE").
W I T N E S S E T H:
A. WHEREAS, subject to the terms and conditions of the Agency Agreement,
Lessor will (i) purchase various parcels of real property from one or more third
parties designated by Lessee and (ii) fund the development, and construction by
the Construction Agent of Improvements on such real property; and
B. WHEREAS, the Basic Term shall commence with respect to each Property
upon the earlier to occur of the Completion of such Property or if such Property
is a Construction Period Property as of the date of any Agency Agreement Event
of Default, the date of such Agency Agreement Event of Default; and
C. WHEREAS, Lessor desires to lease to Lessee, and Lessee desires to
lease from Lessor, each Property;
NOW, THEREFORE, in consideration of the foregoing, and of other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
<PAGE>
ARTICLE I
1.1 DEFINITIONS. Capitalized terms used but not otherwise defined in this
Lease have the respective meanings specified in APPENDIX A to the Participation
Agreement of even date herewith (as such may be amended, modified, supplemented,
restated and/or replaced from time to time, the "PARTICIPATION AGREEMENT") among
the Lessee, the Guarantor, First Security Bank of Utah, N.A., not individually,
except as expressly stated therein, as Owner Trustee under the FH Trust 1995-1,
the Holders, the Lenders and the Agent.
ARTICLE II
2.1 PROPERTY. Subject to the terms and conditions hereinafter set forth
and contained in the respective Lease Supplement relating to each Property,
Lessor hereby leases to Lessee and Lessee hereby leases from Lessor, each
Property.
2.2 LEASE TERM. The term of this Lease with respect to each Property (the
"BASIC TERM") shall begin upon the earlier to occur of (i) the Completion Date
for such Property or (ii) if such Property is a Construction Period Property as
of the date of any Agency Agreement Event of Default, the date of such Agency
Agreement Event of Default (in each case the "BASIC TERM COMMENCEMENT DATE") and
shall end on May 25, 2000 (the "BASIC TERM EXPIRATION DATE"), unless the Term is
extended or earlier terminated in accordance with the provisions of this Lease.
2.3 TITLE. Each Property is leased to Lessee without any representation
or warranty, express or implied, by Lessor and subject to the rights of parties
in possession, the existing state of title (including, without limitation, the
Permitted Exceptions) and all applicable Legal Requirements. Lessee shall in no
event have any recourse against Lessor for any defect in title to any Property
other than in connection with Lessor Liens.
2.4 LEASE SUPPLEMENTS. On or prior to each Basic Term Commencement Date,
Lessee and Lessor shall each execute and deliver a Lease Supplement for the
Property to be leased effective as of such Basic Term Commencement Date in
substantially the form of EXHIBIT A hereto. Lessee hereby irrevocably appoints
Lessor as Lessee's attorney-in-fact, with power of substitution, in the name of
Lessor or the name of Lessee or otherwise, to execute any Lease Supplement which
Lessee fails or refuses to sign in accordance with the terms of this Section 2.4
(including specifically without limitation any Lease Supplement required in
connection with any Construction Period Property upon the occurrence of an
Agency Agreement Event of Default).
<PAGE>
ARTICLE III
3.1 RENT.
(a) Lessee shall pay Basic Rent on each Payment Date, and on any date
on which this Lease shall terminate with respect to any or all Properties
during the Term; provided, however, with respect to each individual
Property Lessee shall have no obligation to pay Basic Rent with respect to
such Property until the Basic Term has commenced with respect to such
Property.
(b) Basic Rent shall be due and payable in lawful money of the United
States and shall be paid by wire transfer of immediately available funds on
the due date therefor to such account or accounts at such bank or banks as
Lessor shall from time to time direct.
(c) Neither Lessee's inability or failure to take possession of all
or any portion of any Property when delivered by Lessor, nor Lessor's
inability or failure to deliver all or any portion of any Property to
Lessee on or before the applicable Basic Term Commencement Date, whether or
not attributable to any act or omission of Lessee or any act or omission of
Lessor (other than an act or omission that constitutes gross negligence or
wilful misconduct of Lessor), or for any other reason whatsoever, shall
delay or otherwise affect Lessee's obligation to pay Rent for such Property
in accordance with the terms of this Lease.
3.2 PAYMENT OF BASIC RENT. Basic Rent shall be paid absolutely net to
Lessor or its designee, so that this Lease shall yield to Lessor the full amount
thereof, without setoff, deduction or reduction.
3.3 SUPPLEMENTAL RENT. Lessee shall pay to Lessor or its designee or to
the Person entitled thereto any and all Supplemental Rent promptly as the same
shall become due and payable, and if Lessee fails to pay any Supplemental Rent,
Lessor shall have all rights, powers and remedies provided for herein or by law
or equity or otherwise in the case of nonpayment of Basic Rent. Lessee shall
pay to Lessor, as Supplemental Rent, among other things, on demand, to the
extent permitted by applicable Legal Requirements, (a) any and all unpaid fees,
charges, payments and other obligations (other than the obligations of Lessor to
pay the principal amount of the Loans and the Holder Amount) due and owing by
Lessor under the Credit Agreement, under the Trust Agreement and/or under any
other Operative Agreement (including specifically without limitation any amounts
owing to the Lenders under Section 2.10 or Section 2.11 of the Credit Agreement
and any amounts owing to the Holders under Section 3.8 or Section 3.9 of the
Trust Agreement) and (b) interest at the applicable Overdue Rate on any
installment of Basic Rent not paid when due for the period for which the same
shall be overdue and on any payment of Supplemental Rent not paid when due or
demanded by Lessor for the period from the due date or the date of any such
demand, as the case may be, until the same shall be paid. The expiration or
other termination of Lessee's obligations to pay Basic Rent hereunder shall not
limit or modify the obligations of Lessee with respect to Supplemental Rent.
Unless expressly provided otherwise in this Lease, in the event of any failure
on the part of Lessee to pay and discharge any Supplemental Rent as and when
due, Lessee shall also promptly pay and discharge any fine, penalty, interest or
cost which may be assessed or added for nonpayment or late payment of such
Supplemental Rent, all of which shall also constitute Supplemental Rent.
<PAGE>
3.4 PERFORMANCE ON A NON-BUSINESS DAY. If any payment is required
hereunder on a day that is not a Business Day, then such payment shall be due on
the next succeeding Business Day or, with respect to Basic Rent, the Scheduled
Interest Payment Date to which such Basic Rent relates.
3.5 RENT PAYMENT PROVISIONS. Lessee shall make payment of all Basic Rent
and Supplemental Rent when due regardless of whether any of the Operative
Agreements pursuant to which same is calculated and is owing shall have been
rejected, avoided or disavowed in any bankruptcy or insolvency proceeding
involving any of the parties to any of the Operative Agreements. Such
provisions of such Operative Agreements and their related definitions are
incorporated herein by reference and shall survive any termination, amendment or
rejection of any such Operative Agreements.
ARTICLE IV
4.1 UTILITY CHARGES. Lessee shall pay or cause to be paid all charges for
electricity, power, gas, oil, water, telephone, sanitary sewer service and all
other rents and utilities used in or on a Property and related real property
during the Term. Lessee shall be entitled to receive any credit or refund with
respect to any utility charge paid by Lessee. The amount of any credit or
refund received by Lessor on account of any utility charges paid by Lessee, net
of the costs and expenses incurred by Lessor in obtaining such credit or refund,
shall be promptly paid over to Lessee. All charges for utilities imposed with
respect to a Property for a billing period during which this Lease expires or
terminates shall be adjusted and prorated on a daily basis between Lessor and
Lessee, and each party shall pay or reimburse the other for such party's pro
rata share thereof.
ARTICLE V
5.1 QUIET ENJOYMENT. Subject to the rights of Lessor contained in
Sections 17.2, 17.3 and 20.3 and the other terms of this Lease and so long as no
Lease Event of Default shall have occurred and be continuing, Lessee shall
peaceably and quietly have, hold and enjoy each Property for the applicable
Term, free of any claim or other action by Lessor or anyone rightfully claiming
by, through or under Lessor (other than Lessee) with respect to any matters
arising from and after the applicable Basic Term Commencement Date.
ARTICLE VI
6.1 NET LEASE. This Lease shall constitute a net lease. Any present or
future law to the contrary notwithstanding, this Lease shall not terminate, nor
shall Lessee be entitled to any abatement, suspension, deferment, reduction,
setoff, counterclaim, or defense with respect to the Rent, nor shall the
obligations of Lessee hereunder be affected (except as expressly herein
permitted and by performance of the obligations in connection therewith) by
reason of: (i) any damage to or destruction of any Property or any part
thereof; (ii) any taking of any Property or any part thereof or interest therein
by Condemnation or otherwise; (iii) any prohibition, limitation, restriction or
prevention of Lessee's use, occupancy or enjoyment of any Property or any part
thereof, or any interference with such use, occupancy or enjoyment by any Person
or for any other reason; (iv) any title defect, Lien or any matter affecting
title to any Property; (v) any eviction by paramount title or otherwise; (vi)
any default by Lessor hereunder; (vii) any action for bankruptcy, insolvency,
reorganization, liquidation, dissolution or other proceeding relating to or
affecting Lessor or any Governmental Authority; (viii) the impossibility or
illegality of performance by Lessor, Lessee or both; (ix) any action of any
Governmental Authority; (x) Lessee's acquisition of ownership of all or part of
any Property; (xi) breach of any warranty or representation with respect to any
Property or any Operative Agreement; (xii) any defect in the condition, quality
or fitness for use of any Property or any part thereof; or (xiii) any other
cause or circumstance whether similar or dissimilar to the foregoing and whether
or not Lessee shall have notice or knowledge of any of the foregoing. The
parties intend that the obligations of Lessee hereunder shall be covenants,
agreements and obligations that are separate and independent from any
obligations of Lessor hereunder and shall continue unaffected unless such
covenants, agreements and obligations shall have been modified or terminated in
accordance with an express provision of this Lease. Lessor and Lessee
acknowledge and agree that the provisions of this Section 6.1 have been
specifically reviewed and subject to negotiation.
<PAGE>
6.2 NO TERMINATION OR ABATEMENT. Lessee shall remain obligated under this
Lease in accordance with its terms and shall not take any action to terminate,
rescind or avoid this Lease, notwithstanding any action for bankruptcy,
insolvency, reorganization, liquidation, dissolution, or other proceeding
affecting Lessor or any Governmental Authority, or any action with respect to
this Lease or any Operative Agreement which may be taken by any trustee,
receiver or liquidator of Lessor or any Governmental Authority or by any court
with respect to Lessor or any Governmental Authority. Lessee hereby waives all
right (i) to terminate or surrender this Lease or (ii) to avail itself of any
abatement, suspension, deferment, reduction, setoff, counterclaim or defense
with respect to any Rent. Lessee shall remain obligated under this Lease in
accordance with its terms and Lessee hereby waives any and all rights now or
hereafter conferred by statute or otherwise to modify or to avoid strict
compliance with its obligations under this Lease. Notwithstanding any such
statute or otherwise, Lessee shall be bound by all of the terms and conditions
contained in this Lease.
ARTICLE VII
7.1 OWNERSHIP OF THE PROPERTY.
(a) Lessor and Lessee intend that (i) for financial accounting
purposes with respect to Lessee (A) this Lease will be treated as an
"operating lease" pursuant to Statement of Financial Accounting Standards
No. 13, as amended, (B) Lessor will be treated as the owner and lessor of
each Property and (C) Lessee will be treated as the lessee of each
Property, but (ii) for federal and all state and local income tax purposes,
for bankruptcy purposes and for all other purposes (A) this Lease will be
treated as a financing arrangement and (B) Lessee will be treated as the
owner of the Properties and will be entitled to all tax benefits ordinarily
available to owners of property similar to the Properties for such tax
purposes.
(b) To the extent this Lease is hereafter deemed to constitute a
finance lease and not a true lease, then and only in such event, Lessor and
Lessee intend and agree that, for the purpose of securing Lessee's
obligations hereunder, (i) this Lease shall be deemed to be a security
agreement and financing statement within the meaning of Article 9 of the
Uniform Commercial Code respecting each of the Properties to the extent
such is personal property and an irrevocable grant and conveyance of a lien
and mortgage on each of the Properties to the extent such is real property;
(ii) the conveyance provided for in Article II shall be deemed to be a
grant by Lessee to Lessor of a lien on and security interest in all of
Lessee's right, title and interest in and to the Property and all proceeds
(including without limitation insurance proceeds) of the conversion,
voluntary or involuntary, of the foregoing into cash, investments,
securities or other property, whether in the form of cash, investments,
securities or other property, and an assignment of all rents, profits and
income produced by the Property; and (iii) notifications to Persons holding
such property, and acknowledgements, receipts or confirmations from
financial intermediaries, bankers or agents (as applicable) of Lessee shall
be deemed to have been given for the purpose of perfecting such security
interest under applicable law. Lessor and Lessee shall, to the extent
consistent with this Lease, take such actions as may be necessary
(including without limitation the filing of Uniform Commercial Code
Financing Statements, Uniform Commercial Code Fixture Filings and the
Mortgage Instruments) to ensure that, if this Lease were deemed to create a
lien and security interest in the Property in accordance with this Section,
such lien and security interest would be deemed to be a perfected lien and
security interest of first priority under applicable law and will be
maintained as such throughout the Term.
ARTICLE VIII
<PAGE>
8.1 CONDITION OF THE PROPERTY. LESSEE ACKNOWLEDGES AND AGREES THAT IT IS
LEASING EACH PROPERTY "AS IS" WITHOUT REPRESENTATION, WARRANTY OR COVENANT
(EXPRESS OR IMPLIED) BY LESSOR AND IN EACH CASE SUBJECT TO (A) THE EXISTING
STATE OF TITLE, (B) THE RIGHTS OF ANY PARTIES IN POSSESSION THEREOF, (C) ANY
STATE OF FACTS WHICH AN ACCURATE SURVEY OR PHYSICAL INSPECTION MIGHT SHOW, (D)
ALL APPLICABLE LEGAL REQUIREMENTS AND (E) VIOLATIONS OF LEGAL REQUIREMENTS WHICH
MAY EXIST ON THE DATE HEREOF. NEITHER LESSOR NOR THE AGENT NOR ANY LENDER NOR
ANY HOLDER HAS MADE OR SHALL BE DEEMED TO HAVE MADE ANY REPRESENTATION, WARRANTY
OR COVENANT (EXPRESS OR IMPLIED) OR SHALL BE DEEMED TO HAVE ANY LIABILITY
WHATSOEVER AS TO THE TITLE, VALUE, HABITABILITY, USE, CONDITION, DESIGN,
OPERATION, MERCHANTABILITY OR FITNESS FOR USE OF ANY PROPERTY (OR ANY PART
THEREOF), OR ANY OTHER REPRESENTATION, WARRANTY OR COVENANT WHATSOEVER, EXPRESS
OR IMPLIED, WITH RESPECT TO ANY PROPERTY (OR ANY PART THEREOF), AND NEITHER
LESSOR NOR THE AGENT NOR ANY LENDER NOR ANY HOLDER SHALL BE LIABLE FOR ANY
LATENT, HIDDEN, OR PATENT DEFECT THEREIN OR THE FAILURE OF ANY PROPERTY, OR ANY
PART THEREOF, TO COMPLY WITH ANY LEGAL REQUIREMENT. THE LESSEE HAS OR WILL HAVE
BEEN AFFORDED FULL OPPORTUNITY TO INSPECT THE PROPERTY AND THE IMPROVEMENTS
THEREIN, IS OR WILL BE (INSOFAR AS THE LESSOR, THE AGENT, EACH LENDER AND EACH
HOLDER ARE CONCERNED) SATISFIED WITH THE RESULTS OF ITS INSPECTIONS AND IS
ENTERING INTO THIS LEASE SOLELY ON THE BASIS OF THE RESULTS OF ITS OWN
INSPECTIONS, AND ALL RISKS INCIDENT TO THE MATTERS DESCRIBED IN THE PRECEDING
SENTENCE, AS BETWEEN THE LESSOR, THE AGENT, THE LENDERS AND THE HOLDERS, ON THE
ONE HAND, AND THE LESSEE, ON THE OTHER HAND, ARE TO BE BORNE BY LESSEE.
8.2 POSSESSION AND USE OF THE PROPERTY.
(a) At all times during the Term with respect to each Property, such
Property shall be used by Lessee in the ordinary course of its business.
Lessee shall pay, or cause to be paid, all charges and costs required in
connection with the use of the Properties as contemplated by this Lease.
Lessee shall not commit or permit any waste of the Properties or any part
thereof.
(b) The address stated below the signature of Lessee herein or on the
applicable Lease Supplement is the chief place of business and chief
executive office of Lessee (as such terms are used in Section 9-103(3) of
the Uniform Commercial Code of any applicable jurisdiction). Regarding a
particular Property, each Lease Supplement contains an accurate legal
description for the related parcel of Land. Lessee has no other places of
business where the Equipment or Improvements will be located other than
those identified on the applicable Lease Supplement.
<PAGE>
ARTICLE IX
9.1 COMPLIANCE WITH LEGAL REQUIREMENTS AND INSURANCE REQUIREMENTS.
Subject to the terms of Article XIII relating to permitted contests, Lessee, at
its sole cost and expense, shall (i) comply with all material Legal Requirements
(including without limitation all material Environmental Laws), and all material
Insurance Requirements relating to the Properties, including the use,
development, construction, operation, maintenance, repair, and restoration
thereof, whether or not compliance therewith shall require structural or
extraordinary changes in the Improvements or interfere with the use and
enjoyment of the Properties, and (ii) procure, maintain and comply with all
material licenses, permits, orders, approvals, consents and other authorizations
required for the construction, use, maintenance and operation of the Properties
and for the use, development, construction, operation, maintenance, repair and
restoration of the Improvements.
ARTICLE X
10.1 MAINTENANCE AND REPAIR; RETURN; APPRAISALS.
(a) Lessee, at its sole cost and expense, shall maintain each
Property in good condition, repair and working order (ordinary wear and
tear excepted) and make all necessary repairs thereto, of every kind and
nature whatsoever, whether interior or exterior, ordinary or extraordinary,
structural or nonstructural or foreseen or unforeseen, in each case as
required by all material Legal Requirements, material Insurance
Requirements, and material manufacturer's specifications and standards and
on a basis consistent with the operation and maintenance of properties or
equipment comparable in type and function to the applicable Property and in
compliance with standard industry practice subject, however, to the
provisions of Article XV with respect to Condemnation and Casualty.
(b) Lessee shall not use or locate any component of any Property
outside of any Approved State. Lessee shall not move or relocate any
component of any Property beyond the boundaries of the Land (comprising
part of the Property) described in the applicable Lease Supplement.
(c) All components which are added to the Property shall immediately
become the property of, and title thereto shall vest in, Lessor, and shall
be deemed incorporated in the Property and subject to the terms of this
Lease as if originally leased hereunder.
(d) Upon reasonable advance notice, Lessor and its agents shall have
the right to inspect each Property and all maintenance records with respect
thereto at any reasonable time during normal business hours but shall not,
in the absence of a Lease Event of Default, materially disrupt the business
of Lessee.
(e) Lessee shall cause to be delivered to Lessor (at Lessee's sole
expense) any Appraisals (or reappraisals) as Lessor may request if any one
of Lessor, the Agent, any Lender or any Holder is required pursuant to any
applicable Legal Requirement to obtain such an Appraisal (or reappraisal)
in addition to the Appraisals delivered in connection with Section 5.6(b)
of the Participation Agreement.
(f) Lessor shall under no circumstances be required to build any
improvements on any Property, make any repairs, replacements, alterations
or renewals of any nature or description to any Property, make any
expenditure whatsoever in connection with this Lease or maintain any
Property in any way. Lessor shall not be required to maintain, repair or
rebuild all or any part of any Property, and Lessee waives the right to (i)
require Lessor to maintain, repair, or rebuild all or any part of any
Property, or (ii) make repairs at the expense of Lessor pursuant to any
Legal Requirement, Insurance Requirement, contract, agreement, covenants,
condition or restriction at any time in effect.
(g) Lessee shall, upon the expiration or earlier termination of this
Lease with respect to a Property, if Lessee shall not have exercised its
Purchase Option or Expiration Date Purchase Option with respect to such
Property, surrender such Property to Lessor, or the third party purchaser,
as the case may be, subject to Lessee's obligations under this Lease
(including without limitation Sections 9.1, 10.1(a)-(f), 10.2, 11.1, 12.1,
22.1 and 23.1).
<PAGE>
10.2 ENVIRONMENTAL INSPECTION. If Lessee has not given notice of exercise
of its Expiration Date Purchase Option pursuant to Section 20.2, then not more
than 120 days nor less than 60 days prior to the Expiration Date, Lessee shall,
at its sole cost and expense, provide to Lessor a normal and customary Phase I
environmental report by a reputable environmental consultant selected by Lessee
and acceptable to Lessor, and any additional report or reports recommended by
such phase one environmental report.
ARTICLE XI
11.1 MODIFICATIONS, SUBSTITUTIONS AND REPLACEMENTS.
(a) Lessee may, either at its sole cost and expense, or with the
proceeds of Construction Advances made pursuant to the terms of the
Participation Agreement during the Construction Period (as specifically
described in Section 5.6 of the Participation Agreement) at any time and
from time to time without the consent of Lessor, make alterations,
renovations, improvements and additions to the Property or any part thereof
and substitutions and replacements therefor (collectively,
"MODIFICATIONS"); PROVIDED, that: (i) except for any Modification required
to be made pursuant to a Legal Requirement, no Modification shall
materially impair the value, utility or useful life of the Property from
that which existed immediately prior to such Modification; (ii) the
Modification shall be done in a good and workmanlike manner; (iii) Lessee
shall comply in all material respects with all Legal Requirements
(including all material Environmental Laws) and Insurance Requirements
applicable to the Modification, including the obtaining of all permits and
certificates of occupancy, and the structural integrity of the Property
shall not be adversely affected; and (iv) to the extent required by Section
14.2(a), Lessee shall maintain builders' risk insurance at all times when a
Modification is in progress; (v) subject to the terms of Article XIII
relating to permitted contests, Lessee shall pay all costs and expenses and
discharge any liens arising with respect to the Modification; and (vi) such
Modification shall comply with the requirements of this Lease (including
without limitation Sections 8.2 and 10.1). All Modifications shall become
property of the Lessor and shall be subject to this Lease, and title to any
component of any Property comprising any such Modifications shall
immediately vest in Lessor.
(b) The construction process provided for in the Agency Agreement is
acknowledged by Lessor and the Agent to be consistent with and in
compliance with the terms and provisions of this Article XI.
ARTICLE XII
12.1 WARRANTY OF TITLE.
(a) Lessee agrees that, except as otherwise provided herein and
subject to the terms of Article XIII relating to permitted contests, Lessee
shall not directly or indirectly create or allow to remain, and shall
promptly discharge at its sole cost and expense, any Lien, defect,
attachment, levy, title retention agreement or claim upon any Property or
any Modifications or any Lien, attachment, levy or claim with respect to
the Rent or with respect to any amounts held by the Agent pursuant to the
Credit Agreement, other than Permitted Liens and Lessor Liens. Lessee
shall promptly notify Lessor in the event it receives actual knowledge that
a Lien other than a Permitted Lien or Lessor Lien has occurred with respect
to a Property, and Lessee represents and warrants to, and covenants with,
Lessor that the Liens in favor of the Lessor created by the Operative
Agreements are first priority perfected liens subject only to Permitted
Liens.
<PAGE>
(b) Nothing contained in this Lease shall be construed as
constituting the consent or request of Lessor, expressed or implied, to or
for the performance by any contractor, mechanic, laborer, materialman,
supplier or vendor of any labor or services or for the furnishing of any
materials for any construction, alteration, addition, repair or demolition
of or to any Property or any part thereof. NOTICE IS HEREBY GIVEN THAT
LESSOR IS NOT AND SHALL NOT BE LIABLE FOR ANY LABOR, SERVICES OR MATERIALS
FURNISHED OR TO BE FURNISHED TO LESSEE, OR TO ANYONE HOLDING A PROPERTY OR
ANY PART THEREOF THROUGH OR UNDER LESSEE, AND THAT NO MECHANIC'S OR OTHER
LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT
THE INTEREST OF LESSOR IN AND TO ANY PROPERTY.
ARTICLE XIII
13.1 PERMITTED CONTESTS OTHER THAN IN RESPECT OF INDEMNITIES. Except to
the extent otherwise provided for in Section 13 of the Participation Agreement,
Lessee, on its own or on Lessor's behalf but at Lessee's sole cost and expense,
may contest, by appropriate administrative or judicial proceedings conducted in
good faith and with due diligence, the amount, validity or application, in whole
or in part, of any Legal Requirement, or utility charges payable pursuant to
Section 4.1 or any Lien, attachment, levy, encumbrance or encroachment, and
Lessor agrees not to pay, settle or otherwise compromise any such item, provided
that (a) the commencement and continuation of such proceedings shall suspend the
collection of any such contested amount from, and suspend the enforcement
thereof against, the applicable Properties, Lessor, the Holders, the Agent and
the Lenders; (b) there shall be no risk of the imposition of a Lien (other than
Permitted Liens) on any Property and no part of any Property nor any Rent would
be in any danger of being sold, forfeited, lost or deferred; (c) at no time
during the permitted contest shall there be a risk of the imposition of criminal
liability or material civil liability on Lessor, any Holder, the Agent or any
Lender for failure to comply therewith; and (d) in the event that, at any time,
there shall be a material risk of extending the application of such item beyond
the end of the Term, then Lessee shall deliver to Lessor an Officer's
Certificate certifying as to the matters set forth in clauses (a), (b) and (c)
of this Section 13.1. Lessor, at Lessee's sole cost and expense, shall execute
and deliver to Lessee such authorizations and other documents as may reasonably
be required in connection with any such contest and, if reasonably requested by
Lessee, shall join as a party therein at Lessee's sole cost and expense.
ARTICLE XIV
14.1 PUBLIC LIABILITY AND WORKERS' COMPENSATION INSURANCE. During the Term
of each Property, Lessee shall procure and carry, at Lessee's sole cost and
expense, commercial general liability insurance for claims for injuries or death
sustained by persons or damage to property while on the Properties or the
premises where the Equipment is located and such other public liability
coverages as are then customarily carried by similarly situated companies
conducting business similar to that conducted by Lessee. Such insurance shall
be on terms and in amounts that (a) are no less favorable than insurance
maintained by Lessee with respect to similar properties and equipment that it
owns and (b) are then carried by similarly situated companies conducting
business similar to that conducted by Lessee. The policies shall be endorsed to
name Lessor, the Holders, the Agent and the Lenders as additional insureds. The
policies shall also specifically provide that such policies shall be considered
primary insurance which shall apply to any loss or claim before any contribution
by any insurance which Lessor, the Holders, the Agent or the Lenders may have in
force. Lessee shall, in the operation of the Properties, comply with the
applicable workers' compensation laws and protect Lessor, the Holders, the Agent
and the Lenders against any liability under such laws.
<PAGE>
14.2 HAZARD AND OTHER INSURANCE.
(a) During the Term for each Property, Lessee shall keep, or cause to
be kept, such Property insured against loss or damage by fire and other
risks and shall maintain builders' risk insurance during construction of
any Improvements or Modifications on terms and in amounts that (a) are no
less favorable than insurance covering other similar properties owned by
Lessee and (b) are then carried by similarly situated companies conducting
business similar to that conducted by Lessee. The policies shall be
endorsed to name Lessor, the Holders, the Agent and the Lenders, to the
extent of their respective interests, as additional loss payees; PROVIDED,
so long as no Lease Event of Default exists, any loss payable under the
insurance policies required by this Section will be paid to Lessee.
(b) During the Term with respect to a Property the area in which such
Property is located is designated a "flood-prone" area pursuant to the
Flood Disaster Protection Act or 1973, or any amendments or supplements
thereto, then Lessee shall comply with the National Flood Insurance Program
as set forth in the Flood Disaster Protection Act of 1973. In addition,
Lessee will fully comply with the requirements of the National Flood
Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, as
each may be amended from time to time, and with any other Legal
Requirement, concerning flood insurance to the extent that it may apply to
any such Property.
14.3 COVERAGE.
(a) As of the date of this Lease and annually thereafter, Lessee
shall furnish Lessor and the Agent with certificates showing the insurance
required under Sections 14.1 and 14.2 to be in effect, naming Lessor, the
Holders, the Agent and the Lenders as additional insureds and loss payees
and evidencing the other requirements of this Article XIV. All such
insurance shall be at the cost and expense of Lessee. Such certificates
shall include a provision for thirty (30) days' advance written notice by
the insurer to Lessor and the Agent in the event of cancellation or
material alteration of such insurance. If a Lease Event of Default has
occurred and is continuing and Lessor so requests, Lessee shall deliver to
Lessor copies of all insurance policies required by Sections 14.1 and
14.2.
(b) Lessee agrees that the insurance policy or policies required by
Sections 14.1, 14.2(a) and 14.2(b) shall include an appropriate clause
pursuant to which any such policy shall provide that it will not be
invalidated should Lessee waive, at any time, any or all rights of recovery
against any party for losses covered by such policy. Lessee hereby waives
any and all such rights against the Lessor, the Holders, the Agent and the
Lenders to the extent of payments made to any such Person under any such
policy.
<PAGE>
(c) Neither Lessor nor Lessee shall carry separate insurance
concurrent in kind or form or contributing in the event of loss with any
insurance required under this Article XIV, except that Lessor may carry
separate liability insurance at Lessor's sole cost so long as (i) Lessee's
insurance is designated as primary and in no event excess or contributory
to any insurance Lessor may have in force which would apply to a loss
covered under Lessee's policy and (ii) each such insurance policy will not
cause Lessee's insurance required under this Article XIV to be subject to a
coinsurance exception of any kind.
(d) Lessee shall pay as they become due all premiums for the
insurance required by Section 14.1 and Section 14.2, shall renew or replace
each policy prior to the expiration date thereof or otherwise maintain the
coverage required by such Sections without any lapse in coverage.
(e) The insurance required to be maintained by Lessee under Sections
14.1 and 14.2 shall be maintained with responsible and reputable insurance
companies or associations having a rating of A or better from Best's.
Lessee shall be deemed to be in compliance with requirements of this
Section 14.3(e) if Lessee insures through a captive Insurance Subsidiary;
provided, that each re-insurer to which coverage is ceded by such captive
Insurance Subsidiary has the ratings specified in this Section 14.3(e) and
the level of self-insurance retained by Lessee is substantially similar to
the level Lessee would have maintained under Sections 14.1 and 14.2.
Lessee may self-insure for workers' compensation liabilities if such self-
insurance is approved by Lessee's board of directors and is conducted in
accordance with applicable Law.
ARTICLE XV
15.1 CASUALTY AND CONDEMNATION.
(a) Subject to the provisions of this Article XV and Article XVI (in
the event Lessee delivers, or is obligated to deliver, a Termination
Notice), and prior to the occurrence and continuation of a Lease Default or
Lease Event of Default, Lessee shall be entitled to receive (and Lessor
hereby irrevocably assigns to Lessee all of Lessor's right, title and
interest in) any award, compensation or insurance proceeds under
Sections 14.2(a) or (b) hereof to which Lessee or Lessor may become
entitled by reason of their respective interests in a Property (i) if all
or a portion of such Property is damaged or destroyed in whole or in part
by a Casualty or (ii) if the use, access, occupancy, easement rights or
title to such Property or any part thereof is the subject of a
Condemnation; PROVIDED, HOWEVER, if a Lease Default or Lease Event of
Default shall have occurred and be continuing such award, compensation or
insurance proceeds shall be paid directly to Lessor or, if received by
Lessee, shall be held in trust for Lessor, and shall be paid over by Lessee
to Lessor and held in accordance with the terms of this paragraph (a). All
amounts held by Lessor hereunder on account of any award, compensation or
insurance proceeds either paid directly to Lessor or turned over to Lessor
shall be held as security for the performance of Lessee's obligations
hereunder.
<PAGE>
(b) Lessee may appear in any proceeding or action to negotiate,
prosecute, adjust or appeal any claim for any award, compensation or
insurance payment on account of any such Casualty or Condemnation and shall
pay all expenses thereof. At Lessee's reasonable request, and at Lessee's
sole cost and expense, Lessor and the Agent shall participate in any such
proceeding, action, negotiation, prosecution or adjustment. Lessor and
Lessee agree that this Lease shall control the rights of Lessor and Lessee
in and to any such award, compensation or insurance payment.
(c) If Lessee shall receive notice of a Casualty or a possible
Condemnation of a Property or any interest therein where damage to the
affected Property is estimated to equal or exceed ten percent (10%) of the
Property Cost of such Property, Lessee shall give notice thereof to the
Lessor and to the Agent promptly after the receipt of such notice.
(d) In the event of a Casualty or a Condemnation (regardless of
whether notice thereof must be given pursuant to paragraph (c)), this Lease
shall terminate with respect to the applicable Property in accordance with
Section 16.1 if Lessee, within thirty (30) days after such occurrence,
delivers to Lessor and the Agent a notice to such effect.
(e) If pursuant to this Section 15.1 this Lease shall continue in
full force and effect following a Casualty or Condemnation with respect to
the affected Property, Lessee shall, at its sole cost and expense and
using, if available, the proceeds of any award, compensation or insurance
with respect to such Casualty or Condemnation (including, without
limitation, any such award, compensation or insurance which has been
received by the Agent and which should be turned over to Lessee pursuant to
the terms of the Operative Agreements), promptly and diligently repair any
damage to the applicable Property caused by such Casualty or Condemnation
in conformity with the requirements of Sections 10.1 and 11.1, using the
as-built plans and specifications or manufacturer's specifications for the
applicable Improvements or Equipment (as modified to give effect to any
subsequent Modifications, any Condemnation affecting the Property and all
applicable Legal Requirements), so as to restore as nearly as practicable
the applicable Property to the same condition, operation, function and
value as existed immediately prior to such Casualty or Condemnation. In
such event, title to the applicable Property shall remain with Lessor.
(f) In no event shall a Casualty or Condemnation with respect to
which this Lease remains in full force and effect under this Section 15.1
affect Lessee's obligations to pay Rent pursuant to Section 3.1.
(g) Notwithstanding anything to the contrary set forth in Section
15.1(a) or Section 15.1(e), if during the Term with respect to a Property a
Casualty occurs with respect to such Property or Lessee receives notice of
a Condemnation with respect to such Property, and following such Casualty
or Condemnation, the applicable Property cannot reasonably be restored,
repaired or replaced on or before the 180th day prior to the Expiration
Date (if such Casualty or Condemnation occurs during the Term) to the same
condition as existed immediately prior to such Casualty or Condemnation or
on or before such day such Property is not in fact so re-stored, repaired
or replaced, then Lessee shall be required to purchase such Property on the
next Payment Date and pay Lessor the Termination Value for such Property
and any and all Rent then due and owing and all other amounts then due and
owing (including without limitation amounts described in clause FIRST of
Section 22.2).
<PAGE>
15.2 ENVIRONMENTAL MATTERS. Promptly upon Lessee's actual knowledge of the
presence of Hazardous Substances in any portion of any Property or Properties in
concentrations and conditions that constitute an Environmental Violation and
which, in the reasonable opinion of Lessee, the cost to undertake any legally
required response, clean up, remedial or other action will result in a cost to
Lessee of more than $100,000, Lessee shall notify Lessor in writing of such
condition. In the event of any Environmental Violation (regardless of whether
notice thereof must be given), Lessee shall, not later than thirty (30) days
after Lessee has actual knowledge of such Environmental Violation, either
deliver to Lessor a Termination Notice with respect to the applicable Property
or Properties pursuant to Section 16.1, if applicable, or, at Lessee's sole cost
and expense, promptly and diligently undertake any response, clean up, remedial
or other action necessary to remove, cleanup or remediate the Environmental
Violation in accordance with all Environmental Laws. If Lessee does not deliver
a Termination Notice with respect to such Property pursuant to Section 16.1,
Lessee shall, upon completion of remedial action by Lessee, cause to be prepared
by a reputable environmental consultant acceptable to Lessor a report describing
the Environmental Violation and the actions taken by Lessee (or its agents) in
response to such Environmental Violation, and a statement by the consultant that
the Environmental Violation has been remedied to the extent required by
applicable Environmental Law.
15.3 NOTICE OF ENVIRONMENTAL MATTERS. Promptly, but in any event within
five (5) Business Days from the date Lessee has actual knowledge thereof, Lessee
shall provide to Lessor written notice of any material pending or threatened
claim, action or proceeding involving any Environmental Law or any Release on or
in connection with any Property or Properties. All such notices shall describe
in reasonable detail the nature of the claim, action or proceeding and Lessee's
proposed response thereto. In addition, Lessee shall provide to Lessor, within
ten (10) Business Days of receipt, copies of all material written communications
with any Governmental Authority relating to any Environmental Law in connection
with any Property. Lessee shall also promptly provide such detailed reports of
any such material environmental claims as may reasonably be requested by Lessor.
ARTICLE XVI
16.1 TERMINATION UPON CERTAIN EVENTS. If any of the following occur: (i)
Lessee has delivered a written notice to the Lessor (in the form described in
Section 16.2(a) (a "TERMINATION NOTICE") pursuant to Section 15.1(d) that
following the applicable Casualty or Condemnation this Lease shall terminate
with respect to the affected Property, or (ii) Lessee has delivered a
Termination Notice pursuant to the second sentence of Section 15.2 that, due to
the occurrence of an Environmental Violation, this Lease shall terminate with
respect to the affected Property, then this Lease shall terminate with respect
to the applicable Property.
16.2 PROCEDURES.
<PAGE>
(a) A Termination Notice shall contain: (i) notice of termination of
this Lease with respect to the affected Property on a Payment Date not more
than sixty (60) days after Lessor's receipt of such Termination Notice but
not later than the Expiration Date, (the "TERMINATION DATE"); and (ii) a
binding and irrevocable agreement of Lessee to pay the Termination Value
for the applicable Property, any and all Rent then due and owing and all
other amounts then due and owing (including without limitation amounts
described in clause FIRST of Section 22.2) and purchase such Property on
such Termination Date.
(b) On each Termination Date, Lessee shall pay to Lessor the
Termination Value for the applicable Property, any and all Rent then due
and owing and all other amounts then due and owing (including without
limitation amounts described in clause FIRST of Section 22.2) theretofore
accruing, and Lessor shall convey such Property or the remaining portion
thereof, if any, to Lessee (or Lessee's designee), all in accordance with
Section 19.1.
ARTICLE XVII
17.1 LEASE EVENTS OF DEFAULT. If any one or more of the following events
(each a "LEASE EVENT OF DEFAULT") shall occur:
(a) Lessee shall fail to make payment of (i) any Basic Rent (except
as set forth in clause (ii)) within five (5) days after the same has become
due and payable or (ii) any Termination Value, on the date any such payment
is due, or any payment of Basic Rent or Supplemental Rent due on the due
date of any such payment of Termination Value, or any amount due on the
Expiration Date;
(b) Lessee shall fail to make payment of any Supplemental Rent (other
than Supplemental Rent referred to in Section 17(a)(ii)) due and payable
within thirty (30) days after receipt of notice thereof (which notice shall
be in lieu of, and not in addition to, any notice required under California
Code of Civil Procedure Section 1161 or any similar or successor law);
(c) Lessee shall fail to maintain insurance as required by Article
XIV of this Lease;
(d) Lessee shall fail to observe or perform any term, covenant or
condition of Lessee under this Lease or any other Operative Agreement to
which Lessee is a party other than those set forth in Sections 17.1(a), (b)
or (c) hereof, or any representation or warranty made by Lessee set forth
in this Lease or in any other Operative Agreement or in any document
entered into in connection herewith or therewith or in any document,
certificate or financial or other statement delivered in connection
herewith or therewith shall be false or inaccurate in any material way;
provided, however, to the extent such failure or misrepresentation or
breach of warranty is capable of being cured an Event of Default shall not
occur under this Section 17.1(d) unless and until such failure or breach
shall remain uncured for a period of thirty (30) days after receipt of
written notice from Lessor thereof (which notice shall be in lieu of, and
not in addition to, any notice required under California Code of Civil
Procedure Section 1161 or any similar or successor law);
<PAGE>
(e) an Agency Agreement Event of Default shall have occurred and be
continuing;
(f) a Guaranty Agreement Event of Default shall have occurred and be
continuing;
(g) Lessee shall (i) admit in writing its inability to pay its debts
generally as they become due, (ii) file a petition under the United States
bankruptcy laws or any other applicable insolvency law or statute of the
United States of America or any State or Commonwealth thereof, (iii) make a
general assignment for the benefit of its creditors, (iv) consent to the
appointment of a receiver of itself or the whole or any substantial part of
its property, (v) fail to cause the discharge of any custodian, trustee or
receiver appointed for Lessee or the whole or a substantial part of its
property within ninety (90) days after such appointment, or (vi) file a
petition or answer seeking or consenting to reorganization under the United
States bankruptcy laws or any other applicable insolvency law or statute of
the United States of America or any State or Commonwealth thereof; or
(h) insolvency proceedings or a petition under the United States
bankruptcy laws or any other applicable insolvency law or statute of the
United States of America or any State or Commonwealth thereof shall be
filed against Lessee and not dismissed within ninety (90) days from the
date of its filing, or a court of competent jurisdiction shall enter an
order or decree appointing, with the consent of Lessee, a receiver of
Lessee or the whole or a substantial part of its property, and such order
or decree shall not be vacated or set aside within ninety (90) days from
the date of the entry thereof;
then, in any such event, (i) all Construction Period Properties shall become
Properties subject to the terms of this Lease as more specifically provided in
Section 2.2 and thereafter all references hereunder to "Property" or
"Properties" and all obligations of the Lessee with respect to the Properties
(including specifically without limitation the obligations of the Lessee
contained in this Article XVII) shall be deemed to include such Construction
Period Properties, and (ii) Lessor may, in addition to the other rights and
remedies provided for in this Article XVII and in Section 18.1, terminate this
Lease by giving Lessee five (5) days notice of such termination, and this Lease
shall terminate, and all rights of Lessee under this Lease shall cease. Lessee
shall, to the fullest extent permitted by law, pay as Supplemental Rent all
costs and expenses incurred by or on behalf of Lessor, including without
limitation fees and expenses of counsel, as a result of any Lease Event of
Default hereunder.
17.2 SURRENDER OF POSSESSION. If a Lease Event of Default shall have
occurred and be continuing, and whether or not this Lease shall have been
terminated pursuant to Section 17.1, Lessee shall, upon thirty (30) days written
notice, surrender to Lessor possession of the Properties. Lessor may enter upon
and repossess the Properties by such means as are available at law or in equity,
and may remove Lessee and all other Persons and any and all personal property
and Lessee's equipment and personalty and severable Modifications from the
Properties. Lessor shall have no liability by reason of any such entry,
repossession or removal performed in accordance with applicable law. Upon the
written demand of Lessor, Lessee shall return the Properties promptly to Lessor,
in the manner and condition required by, and otherwise in accordance with the
provisions of, Section 22.1(c) hereof.
<PAGE>
17.3 RELETTING. If a Lease Event of Default shall have occurred and be
continuing, and whether or not this Lease shall have been terminated pursuant to
Section 17.1, Lessor may, but shall be under no obligation to, relet any or all
of the Properties, for the account of Lessee or otherwise, for such term or
terms (which may be greater or less than the period which would otherwise have
constituted the balance of the Term) and on such conditions (which may include
concessions or free rent) and for such purposes as Lessor may determine, and
Lessor may collect, receive and retain the rents resulting from such reletting.
Lessor shall not be liable to Lessee for any failure to relet any Property or
for any failure to collect any rent due upon such reletting.
17.4 DAMAGES. Neither (a) the termination of this Lease as to all or any
of the Properties pursuant to Section 17.1; (b) the repossession of all or any
of the Properties; nor (c) the failure of Lessor to relet all or any of the
Properties, the reletting of all or any portion thereof, nor the failure of
Lessor to collect or receive any rentals due upon any such reletting, shall
relieve Lessee of its liabilities and obligations hereunder, all of which shall
survive any such termination, repossession or reletting. If any Lease Event of
Default shall have occurred and be continuing and notwithstanding any
termination of this Lease pursuant to Section 17.1, Lessee shall forthwith pay
to Lessor all Rent and other sums due and payable hereunder to and including the
date of such termination (it being intended that Lessor have the remedy
described in California Civil Code Section 1951.4). Thereafter, on the days on
which the Basic Rent or Supplemental Rent, as applicable, are payable under this
Lease or would have been payable under this Lease if the same had not been
terminated pursuant to Section 17.1 and until the end of the Term hereof or what
would have been the Term in the absence of such termination, Lessee shall pay
Lessor, as current liquidated damages (it being agreed that it would be
impossible accurately to determine actual damages) an amount equal to the Basic
Rent and Supplemental Rent that are payable under this Lease or would have been
payable by Lessee hereunder if this Lease had not been terminated pursuant to
Section 17.1, less the net proceeds, if any, which are actually received by
Lessor with respect to the period in question of any reletting of any Property
or any portion thereof; PROVIDED that Lessee's obligation to make payments of
Basic Rent and Supplemental Rent under this Section 17.4 shall continue only so
long as Lessor shall not have received the amounts specified in Section 17.6.
In calculating the amount of such net proceeds from reletting, there shall be
deducted all of Lessor's, any Holder's, the Agent's and any Lenders' reasonable
expenses in connection therewith, including repossession costs, brokerage or
sales commissions, fees and expenses for counsel and any necessary repair or
alteration costs and expenses incurred in preparation for such reletting. To
the extent Lessor receives any damages pursuant to this Section 17.4, such
amounts shall be regarded as amounts paid on account of Rent.
<PAGE>
17.5 [intentionally omitted]
17.6 FINAL LIQUIDATED DAMAGES. If a Lease Event of Default shall have
occurred and be continuing, whether or not this Lease shall have been terminated
pursuant to Section 17.1 and whether or not Lessor shall have collected any
current liquidated damages pursuant to Section 17.4, Lessor shall have the right
to recover, by demand to Lessee and at Lessor's election, and Lessee shall pay
to Lessor, as and for final liquidated damages, but exclusive of the indemnities
payable under Section 13 of the Participation Agreement, and in lieu of all
current liquidated damages beyond the date of such demand (it being agreed that
it would be impossible accurately to determine actual damages) the sum of
(a) the Termination Value for all Properties remaining under this Lease, PLUS
(b) all other amounts owing in respect of Rent and Supplemental Rent heretofore
accruing under this Lease. Upon payment of the amount specified pursuant to the
first sentence of this Section 17.6, Lessee shall be entitled to receive from
Lessor, either at Lessee's request or upon Lessor's election, in either case at
Lessee's cost, a grant and assignment of Lessor's entire right, title and
interest in and to the Properties, the Improvements, Fixtures, Modifications and
Equipment, in each case in recordable form and otherwise in conformity with
local custom and free and clear of the Lien of this Lease and any Lessor Liens.
The Properties shall be conveyed to Lessee (or Lessee's designee) "AS IS" and in
their then present physical condition. If any statute or rule of law shall
limit the amount of such final liquidated damages to less than the amount agreed
upon, Lessor shall be entitled to the maximum amount allowable under such
statute or rule of law; PROVIDED, HOWEVER, Lessee shall not be entitled to
receive Lessor's interest in the Properties, the Improvements, Fixtures,
Modifications or Equipment or documents unless Lessee shall have paid in full
the Termination Value and all other amounts due and owing hereunder and under
the other Operative Agreements.
17.7 [Intentionally Omitted].
17.8 WAIVER OF CERTAIN RIGHTS. If this Lease shall be terminated pursuant
to Section 17.1, Lessee waives, to the fullest extent permitted by law, (a) any
notice of re-entry or the institution of legal proceedings to obtain re-entry or
possession; (b) any right of redemption, re-entry or possession; (c) the benefit
of any laws now or hereafter in force exempting property from liability for rent
or for debt; and (d) any other rights which might otherwise limit or modify any
of Lessor's rights or remedies under this Article XVII.
<PAGE>
17.9 ASSIGNMENT OF RIGHTS UNDER CONTRACTS. If a Lease Event of Default
shall have occurred and be continuing, and whether or not this Lease shall have
been terminated pursuant to Section 17.1, Lessee shall upon Lessor's demand
immediately assign, transfer and set over to Lessor all of Lessee's right, title
and interest in and to each agreement executed by Lessee in connection with the
purchase, construction, development, use or operation of the Properties
(including, without limitation, all right, title and interest of Lessee with
respect to all warranty, performance, service and indemnity provisions), as and
to the extent that the same relate to the purchase, construction, use and
operation of the Properties.
17.10 REMEDIES CUMULATIVE. The remedies herein provided shall be
cumulative and in addition to (and not in limitation of) any other remedies
available at law, equity or otherwise, including, without limitation, any
mortgage foreclosure remedies.
ARTICLE XVIII
18.1 LESSOR'S RIGHT TO CURE LESSEE'S LEASE DEFAULTS. Lessor, without
waiving or releasing any obligation or Lease Event of Default, may (but shall be
under no obligation to) remedy any Lease Event of Default for the account and at
the sole cost and expense of Lessee, including the failure by Lessee to maintain
the insurance required by Article XIV, and may, to the fullest extent permitted
by law, and notwithstanding any right of quiet enjoyment in favor of Lessee,
enter upon any Property, or real property owned or leased by Lessee and take all
such action thereon as may be necessary or appropriate therefor. No such entry
shall be deemed an eviction of any lessee. All reasonable out-of-pocket costs
and expenses so incurred (including without limitation fees and expenses of
counsel), together with interest thereon at the Overdue Rate from the date on
which such sums or expenses are paid by Lessor, shall be paid by Lessee to
Lessor on demand.
ARTICLE XIX
19.1 PROVISIONS RELATING TO LESSEE'S EXERCISE OF ITS PURCHASE OPTION.
Subject to Section 19.2, in connection with any termination of this Lease with
respect to any Property pursuant to the terms of Section 16.2, or in connection
with Lessee's exercise of its Purchase Option, upon the date on which this Lease
is to terminate with respect to a Property or all of the Properties, and upon
tender by Lessee of the amounts set forth in Sections 16.2(b) or 20.2, as
applicable, Lessor shall execute and deliver to Lessee (or to Lessee's designee)
at Lessee's cost and expense a grant and assignment of Lessor's entire interest
in the applicable Property (which shall include an assignment of all of Lessor's
right, title and interest in and to any Net Proceeds not previously received by
Lessor), in each case in recordable form and otherwise in conformity with local
custom and free and clear of the Lien of the Lease and any Lessor Liens
attributable to Lessor but without any other warranties (of title or otherwise)
from the Lessor. The applicable Property shall be conveyed to Lessee "AS IS"
"WHERE IS" and in then present physical condition.
19.2 NO TERMINATION WITH RESPECT TO LESS THAN ALL OF A PROPERTY. Lessee
shall not be entitled to exercise its Purchase Option separately with respect to
Property consisting of Land, Equipment and Improvements but shall be required to
exercise its Purchase Option with respect to an entire Property.
<PAGE>
ARTICLE XX
20.1 INDIVIDUAL PURCHASE OPTION. Provided that the Election Notice
referred to in Section 20.2 has not been delivered, Lessee shall have the
option, exercisable by giving Lessor no more than sixty (60) days and no less
than thirty (30) days irrevocable written notice of Lessee's election to
exercise such option, to either (a) purchase one or more (but not all) of the
Properties on the Scheduled Interest Payment Date identified in such written
notice, at a price equal to the Termination Value for such Property or
Properties (which the parties do not intend to be a "bargain" purchase price),
and Lessee at such time shall also pay any and all Rent then due and owing and
all other amounts then due and owing with respect to the Properties to be
purchased (including without limitation amounts, if any, described in clause
FIRST of Section 22.2); provided, however, that the option referred to in this
subclause (a) may not be exercised by the Lessee (i) if, after giving effect to
such exercise, the aggregate Property Cost of all Properties then subject to the
Lease would be less than $25,000,000 or there would be less than four (4)
separate Properties subject to the terms of this Lease or (ii) if any Lease
Default of the types specified in Sections 17.1(a), (b), (g) or (h) or any Lease
Event of Default shall have occurred and be continuing; or (b) purchase all of
the Properties on any Scheduled Interest Payment Date occurring after the
Construction Period Termination Date as identified in such written notice, at a
price equal to the Termination Value for all of the Properties (which the
parties do not intend to be a "bargain" purchase) and the Lessee at such time
shall also pay all Rent and other amounts then due and payable under this Lease
and under any other Operative Agreement (including without limitation the
amounts described in clause FIRST of Section 22.2). If Lessee exercises its
option to purchase a Property or Properties pursuant to this Section 20.1,
Lessor shall transfer to Lessee all of Lessor's right, title and interest in and
to such Property as of the Scheduled Interest Payment Date on which such
purchase occurs.
20.2 ANNIVERSARY DATE PURCHASE OR SALE OPTION. Not less than 90 days and
no more than 180 days prior to the third anniversary of the Initial Closing Date
and any subsequent annual anniversary of the Initial Closing Date, Lessee may
give Lessor and Agent irrevocable written notice (the "ELECTION NOTICE") that
Lessee is electing to exercise either (a) the option to purchase all of the
Properties on the next succeeding anniversary of the Initial Closing Date (the
"Purchase Option") or (b) the option to remarket the Properties and cause a sale
of the Properties to occur on the next succeeding anniversary of the Initial
Closing Date pursuant to the terms of Section 22.1 (the "Sale Option"). If
Lessee does not give an Election Notice indicating the Sale Option at least 90
days and not more than 180 days prior to the then current Expiration Date, then
Lessee shall be deemed to have elected the Purchase Option for the Expiration
Date. If Lessee shall either (i) elect (or be deemed to elect) to exercise the
Purchase Option or (ii) elect to remarket the Properties pursuant to Section
22.1 and fail to cause all of the Properties to be sold in accordance with the
terms of Section 22.1 on the applicable anniversary of the Initial Closing Date
on which such a sale is required in connection with such election, then in
either case, Lessee shall pay to Lessor on the applicable anniversary date of
the Initial Closing Date an amount equal to the Termination Value for all the
Properties (which the parties do not intend to be a "bargain" purchase) and,
upon receipt of such amount plus all Rent and other amounts then due and payable
under this Lease and under any other Operative Agreement (including without
limitation the amounts described in clause FIRST of Section 22.2), Lessor shall
grant and transfer to Lessee all of Lessor's right, title and interest in and to
the Properties in accordance with Section 19.1.
<PAGE>
20.3 LESSOR'S TRANSFER OPTION. If, on the Construction Period Termination
Date, either the aggregate Property Cost for all Properties then subject to the
terms of this Lease is less than $25,000,000 or there are less than four (4)
separate Properties subject to the terms of this Lease, then Lessor shall have
the option to give Lessee irrevocable written notice that Lessor, on a Scheduled
Interest Payment Date that is not less than thirty (30) days after the date of
such written notice and not more than sixty (60) days after the Construction
Period Termination Date, shall transfer and convey all of its right, title and
interest in and to any or all of the Properties to Lessee. On any transfer and
conveyance date specified by Lessor pursuant to this Section 20.3, (i) Lessor
shall transfer and convey all of its right, title and interest in and to any or
all of the Properties previously specified to Lessee, (ii) Lessee shall accept
such transfer and conveyance of right, title and interest in and to the
respective Property or Properties and (iii) Lessee shall pay the Termination
Value for such respective Property or Properties and all Rent and other amounts
then due and payable under this Lease and under any other Operative Agreement
(including without limitation all costs and expenses referred to in clause FIRST
of Section 22.2), in accordance with Section 19.1.
ARTICLE XXI
21.1 RENEWAL. Provided that no Lease Event of Default shall have occurred
and be continuing and provided that the Lenders have agreed to extend the
Maturity Date to a date that is identical to the final day of the Extended Term,
at the Basic Term Expiration Date or at the expiration of any Extended Term,
Lessee may renew this Lease (the "RENEWAL OPTION") for an Extended Term. Each
renewal of this Lease for an Extended Term shall be on the same terms and
conditions as set forth in this Lease for the original Term (which the parties
do not intend to be "bargain" renewals).
ARTICLE XXII
22.1 SALE PROCEDURE.
(a) During the Marketing Period, Lessee, on behalf of the Lessor,
shall obtain bids for the cash purchase of all of the Properties in
connection with a sale to one or more purchasers to be consummated on the
Expiration Date for the highest price available, shall notify Lessor
promptly of the name and address of each prospective purchaser and the cash
price which each prospective purchaser shall have offered to pay for any
Property and shall provide Lessor with such additional information about
the bids and the bid solicitation procedure as Lessor may reasonably
request from time to time. Lessor may reject any and all bids and may
assume sole responsibility for obtaining bids by giving Lessee written
notice to that effect; PROVIDED, HOWEVER, that notwithstanding the
foregoing, Lessor may not reject the bids for the Properties submitted by
the Lessee if such bids, in the aggregate, are greater than or equal to the
sum of the Limited Recourse Amount for all of the Properties, plus all
costs and expenses referred to in clause FIRST of Section 22.2 and
represent bona fide offers from one or more third party purchasers. If the
price which a prospective purchaser or purchasers shall have offered to pay
for the Properties is less than the sum of the Limited Recourse Amount plus
all costs and expenses referred to in clause FIRST of Section 22.2, Lessor
may elect to retain the Properties by giving Lessee prior written notice of
Lessor's election to retain the Properties, and upon receipt of such
notice, Lessee shall surrender the Properties to Lessor pursuant to Section
10.1. Unless Lessor shall have elected to retain the Properties pursuant
to the preceding sentence, Lessee shall arrange for Lessor to sell the
Properties free of any Lessor Liens attributable to it, without recourse or
warranty (of title or otherwise), for cash on the last day of the Marketing
Period (such date being hereafter referred to as the "Sale Date") to the
purchaser or purchasers identified by Lessee or Lessor, as the case may be;
PROVIDED, HOWEVER, solely as to Lessor or the Trust Company, in its
individual capacity, any Lessor Lien shall not constitute a Lessor Lien so
long as Lessor or the Trust Company, in its individual capacity, is
diligently contesting such Lessor Lien by appropriate proceedings. Lessee
shall surrender the Property so sold or subject to such documents to each
purchaser in the condition specified in Section 10.1. Lessee shall not
take or fail to take any action where the taking or failure to take such
action would have the effect of discouraging bona fide third party bids for
any Property. If the Properties are not either (i) sold on the Sale Date
in accordance with the terms of this Section 22.1, or (ii) retained by the
Lessor pursuant to an affirmative election made by the Lessor pursuant to
the third sentence of this Section 22.1(a), then the Lessee shall be
obligated to pay the Lessor on the Sale Date an amount equal to the
Termination Value for all of the Properties (plus all Rent and other
amounts then due and payable under this Lease and any other Operative
Agreements) in accordance with the terms of Section 20.2.
<PAGE>
(b) If the Properties are sold on the Sale Date to one or more third
party purchasers in accordance with the terms of Section 22.1(a) and the
aggregate purchase price paid for the Properties minus the sum of all costs
and expenses referred to in clause FIRST of Section 22.2 is less than the
sum of the aggregate Termination Values for all of the Properties plus all
Rent and other amounts then due and payable under this Lease and under any
other Operative Agreements (hereinafter such difference shall be referred
to as the "Deficiency Balance"), then the Lessee hereby unconditionally
promises to pay to the Lessor on the Sale Date the lesser of (i) the
Deficiency Balance, or (ii) the Maximum Residual Guarantee Amount for all
of the Properties. If the Properties are retained by the Lessor pursuant
to an affirmative election made by the Lessor pursuant to the third
sentence of Section 22.1(a), then the Lessee hereby unconditionally
promises to pay to the Lessor on the Sale Date an amount equal to the
aggregate Maximum Residual Guaranty Amounts for all of the Properties.
(c) In the event that the Properties are either sold to one or more
third party purchasers on the Sale Date or retained by the Lessor in
connection with an affirmative election made by the Lessor pursuant to the
third sentence of Section 22.1(a), then in either case on the Sale Date the
Lessee shall provide Lessor or such third party purchaser with (i) all
permits, certificates of occupancy, governmental licenses and
authorizations necessary to use and operate such Property for its intended
purposes, and (ii) such easements, licenses, rights-of-way and other rights
and privileges in the nature of an easement as are reasonably necessary or
desirable in connection with the use, repair, access to or maintenance of
such Property for its intended purpose or otherwise as the Lessor shall
reasonably request. All assignments, licenses, easements, agreements and
other deliveries required by clauses (i) and (ii) of this paragraph (c)
shall be in form satisfactory to the Lessor or such third party purchaser,
as applicable, and shall be fully assignable (including both primary
assignments and assignments given in the nature of security) without
payment of any fee, cost or other charge.
22.2 APPLICATION OF PROCEEDS OF SALE. The Lessor shall apply the proceeds
of sale of any Property in the following order of priority:
(i) FIRST, to pay or to reimburse Lessor for the payment of all
reasonable third party costs and expenses incurred by Lessor in connection
with the sale;
(ii) SECOND, so long as the Credit Agreement is in effect and any
Holder Advances or any amount is owing to the Holders under any Operative
Agreement, to the Agent to be applied pursuant to inter-creditor provisions
between the Lenders and the Holders contained in the Operative Agreements;
and
(iii) THIRD, to the Lessee.
22.3 INDEMNITY FOR EXCESSIVE WEAR. If the proceeds of the sale described
in Section 22.1 with respect to the Properties, less all expenses incurred by
Lessor in connection with such sale, shall be less than the Limited Recourse
Amount with respect to the Properties, and at the time of such sale it shall
have been determined (pursuant to the Appraisal Procedure) that the Fair Market
Sales Value of the Properties, shall have been impaired by greater than
reasonably expected wear and tear during the term of the Lease, Lessee shall pay
to Lessor within ten (10) days after receipt of Lessor's written statement (i)
the amount of such excess wear and tear determined by the Appraisal Procedure or
(ii) the amount of the Net Sale Proceeds Shortfall, whichever amount is less.
22.4 APPRAISAL PROCEDURE. For determining the Fair Market Sales Value of
any Property or any other amount which may, pursuant to any provision of any
Operative Agreement, be determined by an appraisal procedure, Lessor and Lessee
shall use the following procedure (the "APPRAISAL PROCEDURE"). Lessor and
Lessee shall endeavor to reach a mutual agreement as to such amount for a period
of ten (10) days from commencement of the Appraisal Procedure under the
applicable section of the Lease, and if they cannot agree within ten (10) days,
then two qualified appraisers, one chosen by Lessee and one chosen by Lessor,
shall mutually agree thereupon, but if either party shall fail to choose an
appraiser within twenty (20) days after notice from the other party of the
selection of its appraiser, then the appraisal by such appointed appraiser shall
be binding on Lessee and Lessor. If the two appraisers cannot agree within
twenty (20) days after both shall have been appointed, then a third appraiser
shall be selected by the two appraisers or, failing agreement as to such third
appraiser within (30) days after both shall have been appointed, by the American
Arbitration Association. The decisions of the three appraisers shall be given
within twenty (20) days of the appointment of the third appraiser and the
decision of the appraiser most different from the average of the other two shall
be discarded and such average shall be binding on Lessor and Lessee; PROVIDED
that if the highest appraisal and the lowest appraisal are equidistant from the
third appraisal, the third appraisal shall be binding on Lessor and Lessee. The
fees and expenses of the appraiser appointed by Lessee shall be paid by Lessee;
the fees and expenses of the appraiser appointed by Lessor shall be paid by
Lessor (such fees and expenses not being indemnified pursuant to Section 13 of
the Participation Agreement); and the fees and expenses of the third appraiser
shall be divided equally between Lessee and Lessor.
<PAGE>
22.5 CERTAIN OBLIGATIONS CONTINUE. During the Marketing Period, the
obligation of Lessee to pay Rent with respect to the Properties (including the
installment of Basic Rent due on the Expiration Date) shall continue
undiminished until payment in full to Lessor of the sale proceeds, if any, the
Maximum Residual Guarantee Amount, the amount due under Section 22.3, if any,
and all other amounts due to Lessor with respect to all Properties. Lessor
shall have the right, but shall be under no duty, to solicit bids, to inquire
into the efforts of Lessee to obtain bids or otherwise to take action in
connection with any such sale, other than as expressly provided in this Article
XXII.
ARTICLE XXIII
23.1 HOLDING OVER. If Lessee shall for any reason remain in possession of
a Property after the expiration or earlier termination of this Lease as to such
Property (unless such Property is conveyed to Lessee), such possession shall be
as a tenancy at sufferance during which time Lessee shall continue to pay
Supplemental Rent that would be payable by Lessee hereunder were the Lease then
in full force and effect with respect to the Property and Lessee shall continue
to pay Basic Rent at 110% of the Basic Rent that would otherwise be due and
payable at such time. Such Basic Rent shall be payable from time to time upon
demand by Lessor and such additional 10% amount shall be applied by the Lessor
to the payment of the Loans pursuant to the Credit Agreement and the Holder
Advances pursuant to the Trust Agreement pro rata between the Loans and the
Holder Advances. During any period of tenancy at sufferance, Lessee shall,
subject to the second preceding sentence, be obligated to perform and observe
all of the terms, covenants and conditions of this Lease, but shall have no
rights hereunder other than the right, to the extent given by law to tenants at
sufferance, to continue their occupancy and use of such Property. Nothing
contained in this Article XXIII shall constitute the consent, express or
implied, of Lessor to the holding over of Lessee after the expiration or earlier
termination of this Lease as to any Property (unless such Property is conveyed
to Lessee) and nothing contained herein shall be read or construed as preventing
Lessor from maintaining a suit for possession of such Property or exercising any
other remedy available to Lessor at law or in equity.
ARTICLE XXIV
24.1 RISK OF LOSS. During the Term, unless Lessee shall not be in actual
possession of the Property in question solely by reason of Lessor's exercise of
its remedies of dispossession under Article XVII, the risk of loss or decrease
in the enjoyment and beneficial use of such Property as a result of the damage
or destruction thereof by fire, the elements, casualties, thefts, riots, wars or
otherwise is assumed by Lessee, and Lessor shall in no event be answerable or
accountable therefor.
<PAGE>
ARTICLE XXV
25.1 ASSIGNMENT.
(a) Lessee may not assign this Lease or any of its rights or
obligations hereunder in whole or in part to any Person unless either (i)
the Lessee obtains the prior written consent of the Agent and the Lessor,
with such consent to be given or withheld in the sole discretion of each
such party or (ii) such transfer is to the Guarantor or a wholly owned
subsidiary of the Guarantor and the Guarantor consents in writing to such
assignment.
(b) No such assignment or other relinquishment of possession to any
Property shall in any way discharge or diminish any of the obligations of
Lessee to Lessor hereunder and Lessee shall remain directly and primarily
liable under this Lease as to any assignment regarding this Lease.
25.2 SUBLEASES.
(a) Promptly following the execution and delivery of any sublease
permitted by this Article XXV, Lessee shall notify Lessor and the Agent of
the execution of such sublease. As of the date of each Lease Supplement,
Lessee shall lease the respective Properties described in such Lease
Supplement from Lessor, and any existing tenant respecting such Property
shall automatically be deemed to be a subtenant of Lessee and not a tenant
of Lessor.
(b) Without the consent of the Lessor, Lessee may (i) sublet up to
100% of an undivided Property to any wholly-owned direct or indirect
subsidiary of the Guarantor, or (ii) sublet not more than 50% of an
undivided Property to any other Person or Persons provided that, in each
case, the term of such sublease or subleases does not extend beyond the
Term. Lessee may not sublet any Property or portion thereof in addition to
that referenced in the preceding sentence without first obtaining the prior
written consent of the Lessor, which consent will not be unreasonably
withheld.
(c) No such sublease or other relinquishment of possession to any
Property shall in any way discharge or diminish any of Lessee's obligations
to Lessor hereunder and Lessee shall remain directly and primarily liable
under this Lease as to the Property, or portion thereof, so sublet.
ARTICLE XXVI
26.1 NO WAIVER. No failure by Lessor or Lessee to insist upon the strict
performance of any term hereof or to exercise any right, power or remedy upon a
default hereunder, and no acceptance of full or partial payment of Rent during
the continuance of any such default, shall constitute a waiver of any such
default or of any such term. To the fullest extent permitted by law, no waiver
of any default shall affect or alter this Lease, and this Lease shall continue
in full force and effect with respect to any other then existing or subsequent
default.
<PAGE>
ARTICLE XXVII
27.1 ACCEPTANCE OF SURRENDER. No surrender to Lessor of this Lease or of
all or any portion of any Property or of any part thereof or of any interest
therein shall be valid or effective unless agreed to and accepted in writing by
Lessor and, prior to the payment or performance of all obligations under the
Credit Documents, the Agent, and no act by Lessor or the Agent or any
representative or agent of Lessor or the Agent, other than a written acceptance,
shall constitute an acceptance of any such surrender.
27.2 NO MERGER OF TITLE. There shall be no merger of this Lease or of the
leasehold estate created hereby by reason of the fact that the same Person may
acquire, own or hold, directly or indirectly, in whole or in part, (a) this
Lease or the leasehold estate created hereby or any interest in this Lease or
such leasehold estate, (b) any right, title or interest in any Property, (c) any
Notes, or (d) a beneficial interest in Lessor.
ARTICLE XXVIII
28.1 [Intentionally Omitted].
ARTICLE XXIX
29.1 NOTICES. All notices, demands, requests, consents, approvals and
other communications hereunder shall be in writing and delivered personally or
by a nationally recognized overnight courier service or mailed (by registered or
certified mail, return receipt requested, postage prepaid), addressed to the
respective parties, as follows:
If to Lessee:
Foundation Health Medical Services
3400 Data Drive
Rancho Cordova, California, 95670
Attention: Chief Financial Officer
Telephone No.: (916) 631-5000
Telecopy No.: (916) 631-5335
<PAGE>
If to Lessor:
First Security Bank of Utah, N.A.
79 South Main Street
Salt Lake City, Utah 84111
Attention: Val T. Orton
Telephone No.: (801) 246-5300
Telecopy No.: (801) 246-5053
with a copy to the Agent:
NationsBank of Texas, N.A.
444 S. Flower Street, Suite 1500
Los Angeles, California 90071
Attention: Mr. Brad DeSpain
Telephone No.: (213) 236-4916
Telecopy No.: (213) 624-5815
with a copy to:
NationsBank of Texas, N.A.
Corporate Credit Services
901 Main Street, 13th Floor
Dallas, Texas 75201
Attention: Marie Lancaster
Telecopy No.: (214) 508-2515
or such additional parties and/or other address as such party may hereafter
designate, and shall be effective upon receipt or refusal thereof.
<PAGE>
ARTICLE XXX
30.1 MISCELLANEOUS. Anything contained in this Lease to the contrary
notwithstanding, all claims against and liabilities of Lessee or Lessor arising
from events commencing prior to the expiration or earlier termination of this
Lease shall survive such expiration or earlier termination. If any provision of
this Lease shall be held to be unenforceable in any jurisdiction, such
unenforceability shall not affect the enforceability of any other provision of
this Lease and such jurisdiction or of such provision or of any other provision
hereof in any other jurisdiction.
30.2 AMENDMENTS AND MODIFICATIONS. Neither this Lease, any Lease
Supplement nor any provision hereof may be amended, waived, discharged or
terminated except by an instrument in writing in recordable form signed by
Lessor and Lessee.
30.3 SUCCESSORS AND ASSIGNS. All the terms and provisions of this Lease
shall inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
30.4 HEADINGS AND TABLE OF CONTENTS. The headings and table of contents in
this Lease are for convenience of reference only and shall not limit or
otherwise affect the meaning hereof.
30.5 COUNTERPARTS. This Lease may be executed in any number of
counterparts, each of which shall be an original, but all of which shall
together constitute one and the same instrument.
30.6 GOVERNING LAW. THIS LEASE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA (EXCEPT TO THE EXTENT
MATTERS RELATED TO A PROPERTY ARE NECESSARILY GOVERNED BY THE LAW OF THE STATE
IN WHICH SUCH PROPERTY IS LOCATED).
30.7 CALCULATION OF RENT. All calculation of Rent payable hereunder shall
be computed based on the actual number of days elapsed over a year of 360 days.
30.8 MEMORANDA OF LEASE AND LEASE SUPPLEMENTS. Lessor and Lessee shall
promptly after the date hereof record this Lease (or a memorandum hereof) and
shall also record each Lease Supplement (or a memorandum thereof), in all cases
at Lessee's cost and expense, and as required under applicable law to
sufficiently evidence this Lease or any such Lease Supplement in the applicable
real estate filing records.
30.9 ALLOCATIONS BETWEEN THE LENDERS AND THE HOLDERS. Notwithstanding any
other term or provision of this Lease to the contrary, the allocations of the
proceeds of the Properties and any and all other Rent and other amounts received
hereunder shall be subject to the inter-creditor provisions between the Lenders
and the Holders contained in the Operative Agreement (or as otherwise agreed
among the Lenders and the Holders from time to time).
<PAGE>
30.10 LIMITATIONS ON RECOURSE. Notwithstanding anything contained in this
Lease to the contrary, Lessee agrees to look solely to Lessor's estate and
interest in the Properties for the collection of any judgment requiring the
payment of money by Lessor in the event of liability by Lessor, and no other
property or assets of Lessor or any shareholder, owner or partner (direct or
indirect) in or of Lessor, or any director, officer, employee, beneficiary,
Affiliate of any of the foregoing shall be subject to levy, execution or other
enforcement procedure for the satisfaction of the remedies of Lessee under or
with respect to this Lease, the relationship of Lessor and Lessee hereunder or
Lessee's use of the Properties or any other liability of Lessor to Lessee.
Nothing in this Section shall be interpreted so as to limit the terms of
Sections 6.1 or 6.2.
[Signature pages follow]
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Lease to be duly executed
and delivered as of the date first above written.
FOUNDATION HEALTH MEDICAL SERVICES
By:
---------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
Address: 3400 Data Drive
Rancho Cordova, California 95670
Attention: Chief Financial Officer
Telephone No.: (916) 631-5000
Telecopy No.: (916) 631-5335
<PAGE>
FIRST SECURITY BANK OF UTAH, N.A.,
not individually, but solely as
Owner Trustee under the FH Trust
1995-1
By:
----------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
Address: 79 South Main Street
Salt Lake City, Utah 84111
Attention: Val T. Orton
Telephone No.: (801) 246-5300
Telecopy No: (801) 246-5053
Receipt of this original
counterpart of the foregoing
Lease is hereby acknowledged
as the date hereof
<PAGE>
NATIONSBANK OF TEXAS, N.A.,
as Agent
By:
----------------------------------------------
Name:
--------------------------------------------
Title:
-------------------------------------------
Address: 444 S. Flower Street, Suite 1500
Los Angeles, CA 90071
Attention: Mr. Brad DeSpain
Telephone No.: (213) 236-4912
Telecopy No: (213) 624-5815
<PAGE>
EXHIBIT A TO
THE LEASE
LEASE SUPPLEMENT NO. ___
THIS LEASE SUPPLEMENT NO. ___ (this "LEASE SUPPLEMENT") dated as of
[________________] between First Security Bank of Utah, N.A., not individually,
but solely as Owner Trustee under the FH Trust 1995-1, as lessor (the "LESSOR"),
and FOUNDATION HEALTH MEDICAL SERVICES, as lessee (the "LESSEE").
WHEREAS, the Lessor is the owner or will be owner of the Property
described on SCHEDULE I hereto (the "LEASED PROPERTY") and wishes to lease the
same to Lessee;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. DEFINITIONS; RULES OF USAGE. For purposes of this Lease
Supplement, capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to them in APPENDIX A to the Participation Agreement,
dated as of _________, 1995, among the Lessee, the Lessor, not individually,
except as expressly stated therein, but solely as Owner Trustee under the FH
Trust 1995-1, __________ and ____________, as the Holders and NationsBank of
Texas, N.A., as Agent for the Lenders.
SECTION 2. THE PROPERTIES. Attached hereto as Schedule I is the
description of the Leased Property, with an Equipment Schedule attached hereto
as Schedule I-A, an Improvement Schedule attached hereto as Schedule I-B and a
legal description of the Land for such Project attached hereto as Schedule I-C.
Effective upon the execution and delivery of this Lease Supplement by the Lessor
and the Lessee, the Leased Property shall be subject to the terms and provisions
of the Lease.
<PAGE>
SECTION 3. RATIFICATION. Except as specifically modified hereby, the
terms and provisions of the Lease and the Operative Agreements are hereby
ratified and confirmed and remain in full force and effect.
SECTION 4. ORIGINAL LEASE SUPPLEMENT. The single executed original of
this Lease Supplement marked "THIS COUNTERPART IS THE ORIGINAL EXECUTED
COUNTERPART" on the signature page thereof and containing the receipt of the
Agent therefor on or following the signature page thereof shall be the original
executed counterpart of this Lease Supplement (the "ORIGINAL EXECUTED
COUNTERPART"). To the extent that this Lease Supplement constitutes chattel
paper, as such term is defined in the Uniform Commercial Code as in effect in
any applicable jurisdiction, no security interest in this Lease Supplement may
be created through the transfer or possession of any counterpart other than the
Original Executed Counterpart.
SECTION 5. GOVERNING LAW. THIS LEASE SUPPLEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF [_________].
SECTION 6. COUNTERPART EXECUTION. This Lease Supplement may be executed
in any number of counterparts and by each of the parties hereto in separate
counterparts, all such counterparts together constituting but one and the same
instrument.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.]
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Lease
Supplement to be duly executed by an officer thereunto duly authorized as of the
date and year first above written.
FIRST SECURITY BANK OF UTAH, N.A., not individually, but solely as Owner
Trustee under the FH Trust 1995-1, as Lessor
By:
-----------------------------------
Name:
----------------------------------
Title:
---------------------------------
FOUNDATION HEALTH MEDICAL SERVICES, as Lessee
By:
----------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Receipt of this original counterpart of the foregoing Lease Supplement is hereby
acknowledged as the date hereof.
NATIONSBANK OF TEXAS, N.A., as Agent
By:
------------------------------------
Name:
----------------------------------
Title:
--------------------------------
<PAGE>
STATE OF _______________ )
) ss:
COUNTY OF ______________ )
The foregoing Lease Supplement was acknowledged before me, the undersigned
Notary Public, in the County of _________________ this _____ day of
______________, by ________________, as __________________ of First Security
Bank of Utah, N.A., a national banking association, not individually, but solely
as Owner Trustee under the FH Trust 1995-1, on behalf of the Owner Trustee.
[Notarial Seal]
Notary Public
My commission expires:____________
<PAGE>
STATE OF _______________ )
) ss:
COUNTY OF ______________ )
The foregoing Lease Supplement was acknowledged before me, the undersigned
Notary Public, in the County of _________________ this _____ day of
______________, by ________________, as __________________ of FOUNDATION HEALTH
MEDICAL SERVICES, a California corporation, on behalf of the corporation.
[Notarial Seal]
Notary Public
My commission expires:____________
<PAGE>
STATE OF _______________ )
) ss:
COUNTY OF ______________ )
The foregoing Lease Supplement was acknowledged before me, the undersigned
Notary Public, in the County of _________________ this _____ day of
______________, by ________________, as __________________ of NATIONSBANK OF
TEXAS, N.A., a national banking association, as Agent.
[Notarial Seal]
Notary Public
My commission expires:____________
<PAGE>
SCHEDULE I
TO LEASE SUPPLEMENT NO. ____
<PAGE>
SCHEDULE I-A
TO LEASE SUPPLEMENT NO. ____
(Equipment)
<PAGE>
SCHEDULE I-B
TO LEASE SUPPLEMENT NO. ____
(Improvements)
<PAGE>
SCHEDULE I-C
TO LEASE SUPPLEMENT NO. ____
(Land)
<PAGE>
EXHIBIT B TO THE LEASE
OTHER NAMES AND LOCATIONS OF LESSEE
<PAGE>
GUARANTY AGREEMENT
THIS GUARANTY AGREEMENT, dated as of May 25, 1995 (the "GUARANTY
AGREEMENT"), is given by FOUNDATION HEALTH CORPORATION, a Delaware corporation
(the "Guarantor"), for the benefit of FIRST SECURITY BANK OF UTAH, N.A., a
national banking association, not individually but solely as Owner Trustee under
the FH Trust 1995-1 (together with its successors and permitted assigns, the
"Owner Trustee"), as lessor under the Lease (hereinafter defined).
W I T N E S S E T H:
WHEREAS, the Owner Trustee, Foundation Health Medical Services, a
California corporation and a wholly-owned subsidiary of the Guarantor ("FHMS"),
the Guarantor, the Holders (hereinafter defined) and the Agent (hereinafter
defined) are party to a Participation Agreement dated as of the date hereof (as
such may be amended from time to time, the "Participation Agreement") which
describes and references certain Operative Agreements (hereinafter defined) and
provides for a financing of certain real estate assets provided by the Lenders
and the Holders in favor of FHMS;
WHEREAS, the Owner Trustee and FHMS are party to an Agency Agreement dated
as of the date hereof (as such may be amended from time to time, the "Agency
Agreement") which provides for FHMS to act as agent for the Owner Trustee in the
acquisition, development and construction of certain real estate assets;
WHEREAS, the Owner Trustee and FHMS are party to a Lease Agreement dated as
of the date hereof (as such may be amended from time to time, the "Lease") which
provides for the leasing by the Owner Trustee to FHMS of certain real estate
assets;
WHEREAS, the financing arrangement evidenced by the documents described
above constitutes a substantial benefit to the Guarantor;
NOW, THEREFORE, IT IS AGREED:
ARTICLE I
DEFINITIONS
1.01 DEFINED TERMS. As used herein, the following terms shall have the
meanings herein specified unless the context otherwise requires. Capitalized
terms used in this Guaranty Agreement and not defined in this Section 1.01 shall
have the meanings given to such terms in APPENDIX A to the Participation
Agreement. Defined terms herein shall include in the singular number the plural
and in the plural the singular:
<PAGE>
"ACQUISITION" means the purchase of capital stock (or options, warrants or
similar instruments convertible into capital stock) of, or merger with, purchase
of assets of, purchase of convertible debt of, a Person not an Affiliate of the
Guarantor or one of its Subsidiaries on the date of determination, or any
combination thereof, in each case involving a purchase in connection with which
the acquiring Person owns 50% or more of the equity interest of such Person
after giving effect to such purchase, substantially all of such Person's assets,
or a line of business or business of such Person, but excluding purchases of
inventory, equipment and supplies in the ordinary course of business.
"AFFILIATE" means, with respect to any Person, any other Person directly or
indirectly controlling, controlled by or under common control with such Person.
The term "control" means the possession, directly or indirectly, of the power,
whether or not exercised, to direct or cause the direction of the management or
policies of any Person, whether through ownership of voting securities, by
contract or otherwise.
"AGENCY AGREEMENT" shall have the meaning given to such term in the second
"WHEREAS" clause hereof.
"AGENT" means NationsBank, as Agent for the Lenders under the Credit
Agreement, together with its successors and assigns.
"CAPITAL LEASE OBLIGATION" means, with respect to any lease of property
which, in accordance with GAAP, should be capitalized on the balance sheet of
any Person, the amount of the liability which should be so capitalized.
"CHANGE OF CONTROL" means an event or series of events by which: (i) any
"person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"), provided that in no event
shall an existing Guarantor employee stock ownership plan or any other Guarantor
employee benefit plan which may hereafter be established by the Guarantor be
deemed a "person" or part of a "group") is or becomes the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly
of 50% or more of the Guarantor's then outstanding voting stock, otherwise than
through a transaction consummated with the prior approval of the Guarantor's
Board of Directors, a majority of whose members are Continuing Directors (as
defined below); or (ii) during any period of two consecutive calendar years,
individuals who, on the date hereof, constitute the Guarantor's Board of
Directors (together with any new director whose election by the Guarantor's
Board of Directors or whose nomination for election by the Guarantor's
stockholders was approved by a vote of at least a majority of the directors then
still in office who either were directors on the date hereof or whose election
or nomination for election was previously so approved) cease for any reason to
constitute a majority of the directors then in office. For the purposes of the
foregoing, the term "Continuing Directors" means, as of the date of any such
approval, (1) individuals who, on the date hereof, are members of the
Guarantor's Board of Directors and (2) any new director whose election by the
Guarantor's Board of Directors or whose nomination for election by the
Guarantor's stockholders is approved by a vote of a least a majority of the
directors then still in office who either are directors on the date hereof or
whose election or nomination for election was previously so approved.
"CONSOLIDATED", "CONSOLIDATING" and similar derivatives of each such word
refers to the consolidation of accounts in accordance with GAAP.
<PAGE>
"CODE" means the Internal Revenue Code of 1986, as amended from time to
time.
"DEBT" of any Person means, without duplication, (i) all indebtedness of
such Person for borrowed money or for the deferred purchase price of property or
services (including, without limitation, all obligations, contingent or
otherwise, of such Person in connection with the drawn portion of any letter of
credit facilities, acceptance facilities or other similar facilities and in
connection with any agreement to purchase, redeem, exchange, convert or
otherwise acquire for value any capital stock of such Person or any warrants,
rights or options to acquire such capital stock, now or hereafter outstanding),
excluding payables for goods or services incurred in the ordinary course of
business and not overdue for a period of ninety days or more and deferred
compensation arrangements with officers, directors and employees, (ii) all
obligations of such Person evidenced by bonds, notes, debentures or other
similar instruments, (iii) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (even though the rights and remedies of the seller or
lender under such agreement in the event of default are limited to repossession
or sale of such property), (iv) all Capital Lease Obligations of such Person
(but excluding any obligation of such Person under a lease that is an operating
lease as determined in accordance with GAAP), (v) all obligations, contingent or
otherwise, of such Person in connection with interest rate exchange agreements,
foreign exchange rate agreements and similar agreements (provided that the
obligations under such agreements shall be recorded on a net basis and marked to
market on a current basis), (vi) all Debt of another Person secured by (or for
which the holder of such Debt has an existing right, contingent or otherwise, to
be secured by) any lien, security interest or other charge or encumbrance upon
or in property (including, without limitation, accounts and contract rights)
owned by such Person, even though such Person has not assumed or become liable
for the payment of such Debt, (vii) all Guaranteed Debt and (viii) if an ERISA
Event shall have occurred with respect to any Plan, the Insufficiency (if any)
of such Plan (or, in the case of a Plan with respect to which an ERISA Event
described in clause (iii) through (vi) of the definition of ERISA Event shall
have occurred, the liability related thereto).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations promulgated and rulings issued
thereunder.
"ERISA AFFILIATE" means any Person that for the purposes of Title IV of
ERISA is a member of the Guarantor's controlled group, or under common control
with the Guarantor within the meaning of Section 414 of the Code and the
regulations promulgated and rulings issued thereunder.
"ERISA EVENT" means (i) the occurrence of a reportable event, within the
meaning of Section 4043 of ERISA, unless the 30-day notice requirement with
respect thereto has been waived by the PBGC; (ii) the provision by the
administrator of any Plan of a notice of intent to terminate such Plan, pursuant
to Section 4041(a)(2) of ERISA (including any such notice with respect to a plan
amendment referred to in Section 4041(e) of ERISA); (iii) the cessation of
operations at a facility in the circumstances described in Section 4068(f) of
ERISA; (iv) the withdrawal by the Guarantor or an ERISA Affiliate from a
Multiple Employer Plan during a plan year for which it was a substantial
employer, as defined in Section 4001(a)(2) of ERISA; (v) the failure by the
Guarantor or any ERISA Affiliate to make a payment to a Plan required under
Section 302(f)(l) of ERISA, which Section imposes a lien for failure to make
required payments; (vi) the adoption of an amendment to a Plan requiring the
provision of security to such Plan, pursuant to Section 307 of ERISA; or
(vii) the institution by the PBGC of proceedings to terminate a Plan, pursuant
to Section 4042 of ERISA, or the occurrence of any event or condition which
might constitute grounds under Section 4042 of ERISA for the termination of, or
the appointment of a trustee to administer, a Plan.
<PAGE>
"EVENT OF DEFAULT" shall have the meaning given to such term in
Section 2.05(a) hereof.
"EXISTING CREDIT AGREEMENT" shall mean the Original Credit Agreement, as
such may hereafter be amended, modified, supplemented, restated and/or replaced
from time to time.
"EXISTING CREDIT AGREEMENT EVENT OF DEFAULT" shall mean an "Event of
Default" as such term is defined in the Existing Credit Agreement.
"FHMS" shall have the meaning given to such term in the first "WHEREAS"
clause hereof.
"FHMS OBLIGATIONS" shall have the meaning given to such term in Section
2.01 hereof.
"FISCAL YEAR" means, with respect to any Person, a fiscal year of such
Person.
"GAAP" shall have the meaning given to such term in the Participation
Agreement.
"GUARANTEED DEBT" of any Person means all Debt referred to in clause (i),
(ii), (iii), (iv) or (v) of the definition of "Debt" in this Section 1.01
guaranteed directly or indirectly in any manner by such Person, or in effect
guaranteed directly or indirectly by such Person through an agreement (i) to pay
or purchase such Debt or to advance or supply such funds for the payment or
purchase of such Debt, (ii) to purchase, sell or lease (as lessee or lessor)
property, or to purchase or sell services, primarily for the purpose of enabling
the debtor to make payment of such Debt or to assure the holder of such Debt
against loss, (iii) to supply funds to, or in any other manner invest in, the
debtor (including any agreement to pay for property or services irrespective of
whether such property is received or such services are rendered) or (iv)
otherwise to assure a creditor against loss.
"GUARANTOR" shall have the meaning given to such term in the first
paragraph hereof.
"GUARANTY AGREEMENT" shall have the meaning given to such term in the first
paragraph hereof.
"GUARANTY DOCUMENTS" shall mean, collectively, the Guaranty Agreement and
the Participation Agreement.
"HMO" means a health maintenance organization doing business as such (or
required to qualify or to be licensed as such) under HMO Regulations.
"HMO EVENT" means material non-compliance by the Guarantor or any of its
Material Subsidiaries with any of the terms and provisions of the HMO
Regulations pertaining to fiscal soundness, solvency or financial condition; or
the assertion in writing, after the date hereof, by an HMO Regulator that it
intends to take administrative action against the Guarantor or any of its
Material Subsidiaries to revoke or modify any material contract of insurance,
license, charter or permit, or to enforce the fiscal soundness, solvency or
financial provisions or requirements of the HMO Regulations against any of such
entities as a result of any material non-compliance therewith.
<PAGE>
"HMO REGULATIONS" means all laws, regulations, directives and
administrative orders applicable under federal or state law to HMOs as such.
"HMO REGULATOR" means any Person charged with the administration, oversight
or enforcement of an HMO Regulation.
"HOLDERS" shall have the meaning given to such term in APPENDIX A to the
Participation Agreement.
"INCORPORATED COVENANTS" shall have the meaning given to such term in
Article IV hereof.
"INCORPORATED FINANCIAL COVENANTS" means the financial covenants contained
in Section 5.03 of the Original Credit Agreement, together with any amendments,
modifications, substitutions or replacements thereof which are part of the
Incorporated Covenants in accordance with the terms of Article IV hereof.
"INCORPORATED REPRESENTATIONS AND WARRANTIES" shall have the meaning given
to such term in Article III hereof.
"INSUFFICIENCY" means with respect to any Plan, the amount, if any, of its
unfunded benefit liabilities, as defined in Section 4001(a)(18) of ERISA.
"LEASE" shall have the meaning given to such term in the third "WHEREAS"
clause hereof.
"LENDER" or "LENDERS" means each of the Lender now or hereafter named under
the Credit Agreement.
"LIEN" shall have the meaning given to such term in APPENDIX A to the
Participation Agreement.
"LOSS" shall have the meaning given to such term in Section 5.04(c) hereof.
"MATERIAL SUBSIDIARY" means each Subsidiary that (i) for the most recent
Fiscal Year of the Guarantor, accounted for more than 5% of the Consolidated
revenues of the Guarantor or (ii) as at the end of such fiscal year, was the
owner, directly or indirectly, of more than 5% of the Consolidated assets of the
Guarantor, all as shown on its Consolidated financial statements for such Fiscal
Year, PROVIDED that in the case of a Subsidiary acquired during a Fiscal Year,
clause (i) shall not be applicable until the following Fiscal year and clause
(ii) shall be determined on a pro forma basis in the case of such Subsidiary,
giving effect to such acquisition as if it occurred at the end of such Fiscal
year.
"MULTIEMPLOYER PLAN" means a "multiemployer plan" as defined in Section
4001(a)(3) of ERISA to which the Guarantor or any ERISA Affiliate is making or
accruing an obligation to make contributions, or has within any of the preceding
five plan years made or accrued an obligation to make contributions, such plan
being maintained pursuant to one or more collective bargaining agreements.
<PAGE>
"MULTIPLE EMPLOYER PLAN" means a single employer plan, as defined in
Section 4001(a)(15) of ERISA, which (i) is maintained for employees of the
Guarantor or an ERISA Affiliate and at least one Person other than the Guarantor
and its ERISA Affiliates or (ii) was so maintained and in respect of which the
Guarantor or any ERISA Affiliate could have liability under Section 4064 or 4069
of ERISA in the event such plan has been or were to be terminated.
"NATIONSBANK" means NationsBank of Texas, N.A., a national banking
association, and its successors and assigns.
"NET WORTH" of any Person on any date of determination means an amount
equal to the excess of Total Assets over Total Liabilities of such Person.
"NEW FACILITY" shall have the meaning given to such term in Article IV
hereof.
"OPERATIVE AGREEMENTS" shall have the meaning given to such term in
APPENDIX A to the Participation Agreement.
"ORIGINAL CREDIT AGREEMENT" shall mean the Revolving Credit Agreement dated
as of December 5, 1994 among the Guarantor, the various banks and financial
institutions which are parties thereto, CitiCorp USA, Inc., as administrative
agent, Wells Fargo Bank, N.A. and NationsBank, as co-agents and CitiCorp
Securities, Inc., as arranger.
"OWNER TRUSTEE" shall have the meaning given to such term in the first
paragraph hereof.
"PARTICIPATION AGREEMENT" shall have the meaning given to such term in the
first "WHEREAS" clause hereof.
"PBGC" means the Pension Benefit Guaranty Corporation.
"PERSON" means any individual, partnership, joint venture, firm,
corporation, association, trust or other enterprise (whether or not
incorporated), or any government or political subdivision or any agency,
department or instrumentality thereof.
"PLAN" means a Single-Employer Plan or a Multiple Employer Plan.
"SINGLE-EMPLOYER PLAN" means a single employer plan, as defined in Section
4001(a)(15) of ERISA, which (i) is maintained for employees of the Guarantor or
an ERISA Affiliate and no Person other than the Guarantor and its ERISA
Affiliates or (ii) was so maintained and in respect of which the Guarantor or an
ERISA Affiliate could have liability under Section 4069 of ERISA in the event
such plan has been or were to be terminated.
"SUBSIDIARY" of any Person means any corporation, partnership, joint
venture, trust or estate of which (or in which) more than 50% of:
(i) the outstanding capital stock having ordinary voting power
to elect a majority of the Board of Directors of such corporation
(irrespective of whether or not at the time capital stock of any other
class or classes of such corporation shall or might have voting power upon
the occurrence of any contingency),
(ii) the interest in the capital or profits of such partnership
or joint venture, or
(iii) the beneficial interest of such trust or estate,
is at the time directly or indirectly owned by such Person, by such Person and
one or more of its other Subsidiaries, or by one or more of such Person's other
Subsidiaries,
<PAGE>
"TOTAL ASSETS" of any Person means all property, whether real, personal,
tangible, intangible or otherwise, that, in accordance with GAAP, should be
included in determining total assets as shown on the assets portion of a balance
sheet of such Person.
"TOTAL LIABILITIES" of any Person at any date means all obligations that,
in accordance with GAAP, would be included in determining total liabilities as
shown on the liabilities side of a balance sheet of such Person at such date.
"WITHDRAWAL LIABILITY" has the meaning given such term under Part I of
Subtitle E of Title IV of ERISA.
1.02 COMPUTATION OF TIME PERIODS. For purposes of computation of periods
of time hereunder, the word "from" means "from and including" and the words "to"
and "until" each mean "to and including."
1.03 ACCOUNTING TERMS. Accounting terms used but not otherwise defined
herein shall have the meanings provided, and be construed in accordance with,
GAAP.
<PAGE>
ARTICLE II
BASIC GUARANTY PROVISIONS
2.01 THE GUARANTEE. The Guarantor hereby guarantees to the Owner Trustee,
(i) the payment by FHMS when due (whether by acceleration or otherwise) of all
amounts owing under the Agency Agreement, the Lease and/or under any of the
other Operative Agreements to which FHMS is a party, including specifically
without limitation all payments under the Agency Agreement, Basic Rent,
Supplemental Rent, and other amounts now or hereafter owing by FHMS in
connection with the Agency Agreement, the Lease and/or the other Operative
Agreements to which FHMS is a party, as such obligations may be modified,
extended or renewed from time to time, and (ii) the performance by FHMS of all
obligations under the Agency Agreement, the Lease, the Participation Agreement
and/or the other Operative Agreements to which FHMS is a party, (hereinafter
such obligations under subsections (i) and (ii) may be referred to herein as the
"FHMS Obligations").
2.02 OBLIGATIONS UNCONDITIONAL. The Guarantor agrees that the obligations
of the Guarantor under Section 2.01 hereof are absolute and unconditional,
irrespective of the value, genuineness, validity, regularity or enforceability
of any of the Operative Agreements, or any other agreement or instrument
referred to therein, or any substitution, release or exchange of any other
guarantee of or security for any of the FHMS Obligations, and, to the fullest
extent permitted by applicable law, irrespective of any other circumstance
whatsoever which might otherwise constitute a legal or equitable discharge or
defense of a surety, guarantor or co-obligor, it being the intent of this
Section 2.02 that the obligations of the Guarantor hereunder shall be absolute
and unconditional under any and all circumstances. Without limiting the
generality of the foregoing, it is agreed that the occurrence of any one or more
of the following shall not alter or impair the liability of the Guarantor
hereunder which shall remain absolute and unconditional as described above:
(i) at any time or from time to time, without notice to the
Guarantor, the time for any performance of or compliance with any of the
FHMS Obligations shall be extended, or such performance or compliance shall
be waived;
(ii) any of the acts mentioned in any of the provisions of any of
the Operative Agreements or any other agreement or instrument referred
therein shall be done or omitted;
(iii) the maturity of any of the FHMS Obligations shall be
accelerated, or any of the FHMS Obligations shall be modified, supplemented
or amended in any respect, or any right under any of the Operative
Agreements or any other agreement or instrument referred to therein shall
be waived or any other guarantee of any of the FHMS Obligations or any
security therefor shall be released or exchanged in whole or in part or
otherwise dealt with;
(iv) any Lien granted to, or in favor of, the Agent, the Lenders
or the Holders as security for any of the FHMS Obligations (or as security
for the guarantee thereof by the Guarantor) shall fail to attach or be
perfected; or
(v) any of the FHMS Obligations shall be determined to be void
or voidable or shall be subordinated to the claims of any Person.
<PAGE>
2.03 REINSTATEMENT. The obligations of the Guarantor under this Section 2
shall be automatically reinstated if and to the extent that for any reason any
payment by or on behalf of any Person in respect of the FHMS Obligations is
rescinded or must be otherwise restored by any holder of any of the FHMS
Obligations, whether as a result of any proceedings in bankruptcy or
reorganization or otherwise.
2.04 WAIVERS BY THE GUARANTOR. (a) With respect to its obligations
hereunder, the Guarantor hereby expressly waives diligence, presentment, demand
of payment, protest and all notices whatsoever, and any requirement that the
Owner Trustee exhaust any right, power or remedy or proceed against any Person
under any of the Operative Agreements or any other agreement or instrument
referred to therein, or against any other Person under any other guarantee of,
or security for, any of the FHMS Obligations. Without limiting the generality
of the foregoing or of any other provision of this Guaranty Agreement, and to
the extent permitted by law, the Guarantor also hereby waives and agrees not to
assert or take advantage of (as a defense or otherwise):
(i) Any right to require the Owner Trustee to proceed against
FHMS or any other Person or to proceed against or exhaust any security held
by the Owner Trustee at any time or to pursue any other remedy available to
the Owner Trustee under any other agreement before proceeding against the
Guarantor hereunder;
(ii) The defense of the statute of limitations in any action
hereunder;
(iii) Any defense that may arise by reason of the incapacity, lack
of authority, death or disability of any other Person or Persons or the
failure of the Owner Trustee to file or enforce a claim against the estate
(in administration, bankruptcy or any other proceeding) of any other Person
or Persons;
(iv) Any failure on the part of the Owner Trustee to ascertain
the extent or nature of the collateral subject to any of the Security
Documents or any insurance or other rights with respect thereto, or the
liability of any party liable with respect to the FHMS Obligations;
(v) Any defense based upon an election of remedies by the Owner
Trustee;
(vi) Any right or claim to cause a marshaling of the assets of
the Guarantor;
(vii) Any principle or provision of law, statutory or otherwise,
which is or might be in conflict with the terms and provisions of this
Guaranty Agreement;
(viii) Any duty on the part of the Owner Trustee to disclose to the
Guarantor any facts that the Owner Trustee may now or hereafter know about
FHMS or the Properties, regardless of whether the Owner Trustee has reason
to believe that any such facts materially increase the risk beyond that
which the Guarantor intends to assume or has reason to believe that such
facts are unknown to the Guarantor or has a reasonable opportunity to
communicate such facts to the Guarantor, it being understood and agreed
that the Guarantor is fully responsible for being and keeping informed of
the financial condition of FHMS, of the condition of the Properties, and of
any and all circumstances bearing on the risk that liability may be
incurred by the Guarantor hereunder;
<PAGE>
(ix) Any lack of notice of disposition or of manner of
disposition of any collateral subject to any of the Security Documents;
(x) Failure to properly record any document or any other lack of
due diligence by the Owner Trustee in creating or perfecting a security
interest in or collection, protection or realization upon any Property or
in obtaining reimbursement or performance from any Person or entity now or
hereafter liable for the FHMS Obligations;
(xi) The inaccuracy of any representation or other provision
contained in any Operative Agreement (other than a representation by the
Owner Trustee);
(xii) Any sale or assignment of the FHMS Obligations or the
Operative Agreements, in whole or in part;
(xiii) Any sale or assignment by FHMS of any Property, or any
portion thereof or interest therein, whether or not consented to by the
Owner Trustee and any release by the Owner Trustee of any Property;
(xiv) Any invalidity, irregularity or unenforceability, in whole
or in part, of any one or more of the Operative Agreements;
(xv) Any lack of commercial reasonableness in dealing with any
Property;
(xvi) Any deficiencies in any Property or any deficiency in the
ability of the Owner Trustee to collect or to obtain performance from any
Persons or entities now or hereafter liable for the payment and performance
of any of the FHMS Obligations;
(xvii) An assertion or claim that the automatic stay provided by 11
U.S.C. Section 362 (arising upon the voluntary or involuntary bankruptcy
proceeding of FHMS) or any other stay provided under any other debtor
relief law (whether statutory, common law, case law or otherwise) of any
jurisdiction whatsoever, now or hereafter in effect, which may be or become
applicable, shall operate or be interpreted to stay, interdict, condition,
reduce or inhibit the ability of the Owner Trustee, to enforce any of its
rights, whether now or hereafter acquired, which the Owner Trustee may have
against the Guarantor or the Property;
(xviii) Any modification of the Operative Agreements or any
obligation of FHMS relating to the FHMS Obligations by operation of law or
by action of any court, whether pursuant to the Bankruptcy Reform Act of
1978, as amended, or any other debtor relief law (whether statutory, common
law, case law or otherwise) of any jurisdiction whatsoever, now or
hereafter in effect, or otherwise;
(xix) Any change in the composition of FHMS;
(xx) The release of FHMS or of any other Person or entity from
performance or observance of any of the agreements, covenants, terms or
conditions contained in any agreements, documents or instruments; and
(xxi) Without limiting the generality of the foregoing, any rights
and benefits which might otherwise be available to any guarantor under
California Civil Code Sections 2809, 2810, 2815, 2819, 2822, 2839, 2845
through 2847, 2848, 2849, 2850, 2899 and 3433, and California Code of Civil
Procedure Sections 580a, 580b, 580d and 726, and any successor sections to
such sections of the Civil Code and Code of Civil Procedures.
<PAGE>
The Guarantor expressly acknowledges and agrees to the foregoing waivers in
subclause (xxi) and the Guarantor further understands (with respect to
California law) that: (A) Section 580d of the California Code of Civil Procedure
generally prohibits a deficiency judgment against a borrower after a non-
judicial foreclosure; (B) Guarantor's subrogation rights may be destroyed by a
non-judicial foreclosure under the Mortgage Instrument (because the Guarantor
may not be able to pursue FHMS for a deficiency judgment by reason of the
application of Section 580d of the California Code of Civil Procedure); (C)
under UNION BANK V. GRADSKY, 265 Cal. App. 2nd 40 (1968), a lender may be
estopped from pursuing a guarantor for a deficiency judgment after a non-
judicial foreclosure (on the theory that a guarantor should be exonerated if a
lender elects a remedy that eliminates the guarantor's subrogation rights)
absent an explicit waiver, and (D) GRADSKY, SUPRA PROVIDES THAT THE GUARANTOR
MAY WAIVE THAT DEFENSE, THUS ALLOWING A LENDER TO PURSUE THE GUARANTOR ON ITS
GUARANTEE EVEN THOUGH THE GUARANTOR WILL NOT BE ABLE TO PURSUE FHMS BECAUSE THE
GUARANTOR'S SUBROGATION RIGHTS WILL HAVE BEEN DESTROYED. Without limitation on
the generality of the other waivers contained in this Guaranty Agreement, the
Guarantor hereby waives all rights and defenses arising out of an election of
remedies by the creditor, even though that election of remedies, such as a
nonjudicial foreclosure with respect to security for a guaranteed obligation,
has destroyed the Guarantor's rights of subrogation and reimbursement against
the principal by the operation of Section 580d of the Code of Civil Procedure of
California or otherwise.
(b) Without limitation to the provisions of the preceding subparagraph (a)
or any other term or provision of this Guaranty Agreement, the Guarantor
specifically acknowledges and agrees and consents to (i) the conveyance by the
Owner Trustee from time to time of all or any part of the Property, as
determined by Owner Trustee in its sole discretion, without notice to or consent
of the Guarantor, and (ii) the non-recourse provisions of Section 14.10 of the
Participation Agreement.
2.05 EVENTS OF DEFAULT; REMEDIES.
(a) EVENTS OF DEFAULT. If any of the following events (each an
"Event of Default" and collectively "Events of Default") shall occur and be
continuing:
(i) The Guarantor shall (A) fail to perform or observe
any term, covenant or agreement of any of the Incorporated
Financial Covenants, or (B) fail to perform or observe any term,
covenant or agreement referenced in Article IV (other than the
Incorporated Financial Covenants referred to in subclause (A)) or
the Guarantor shall fail to perform or observe any other term,
covenant or agreement contained in this Guaranty Agreement or in
any other Operative Agreement on its part to be performed or
observed if such failure shall remain unremedied for 30 days
after written notice thereof shall have been given to the
Guarantor by the Agent, any Lender or any Holder; or
<PAGE>
(ii) The Guarantor or any of its Subsidiaries shall
fail to pay any Debt in a principal payment amount (whether
singly or in the aggregate) equal to or in excess of $10,000,000
(but excluding Debt outstanding under the Existing Credit
Agreement or the promissory notes issued in connection with the
Existing Credit Agreement) of the Guarantor or such Subsidiary,
as the case may be, when the same becomes due and payable
(whether by scheduled maturity, required prepayment,
acceleration, demand or otherwise (and inclusive of principal,
interest, fees and penalties)), and such failure shall continue
after the applicable grace period, if any, specified in the
agreements or instruments relating to such Debt; or any other
event shall occur or condition shall exist under any agreements
or instruments relating to any such Debt and shall continue after
the applicable grace period (which grace period, if shorter than
30 days, shall be deemed extended to 30 days for purposes of this
subsection (ii) if (A) such Debt was assumed in connection with
an Acquisition and is in aggregate principal amount of not in
excess of $20,000,000, (B) not more than 90 days have elapsed
since the consummation of such Acquisition and (C) the Guarantor
shall have segregated cash in an amount sufficient to pay the
principal amount of such Debt plus interest and premium, if any,
then due thereon within such 30 day period), if any, specified in
such agreements or instruments, if the effect of such event or
condition is to accelerate, or to permit the acceleration of, the
maturity of such Debt; or any such Debt shall be declared to be
due and payable, or required to be prepaid (other than by a
regularly scheduled required prepayment), prior to the stated
maturity thereof; or
(iii) The Guarantor, any of its Material Subsidiaries or
two or more of the Guarantor's Subsidiaries in any twelve-month
period shall generally not pay its debts as such debts become
due, or shall admit in writing its inability to pay its debts
generally, or shall make a general assignment for the benefit of
creditors; or any proceeding shall be instituted by or against
the Guarantor or any of its Subsidiaries seeking to adjudicate
the issue as to whether the entity is bankrupt or insolvent, or
seeking liquidation, winding up, reorganization, arrangement,
adjustment, protection, relief, or composition of it or its debts
under any law relating to bankruptcy, insolvency or
reorganization or relief of debtors, or seeking the entry of an
order for relief of the appointment of a receiver, trustee, or
other similar official for it or for any substantial part of its
property, and, in the case of any such proceeding instituted
against it (but not instituted by it), either such proceeding
shall remain undismissed or unstayed for a period of 60 days, or
any of the actions sought in such proceeding (including, without
limitation, the entry of an order for relief against, or the
appointment of a receiver, trustee, custodian or similar official
for, the entity or for any substantial part of its property)
shall occur; or the Guarantor or any of its Subsidiaries shall
take any corporate action to authorize any of the actions set
forth above in this subsection (iii); or
<PAGE>
(iv) Any judgment or order for the payment of money in
an aggregate amount in excess of $10,000,000 (less any payments
made in respect thereof) shall be rendered against the Guarantor
or any of its Subsidiaries, and either (A) enforcement
proceedings shall have been commenced by any creditor upon such
judgment or order or (B) there shall be any period of 60
consecutive days during which a stay of enforcement of such
judgment or order, by reason of a pending appeal, statutory bond
or otherwise, shall not be in effect; or
(v) Any non-monetary judgment or order shall be
rendered against the Guarantor or any of its Subsidiaries that
has a Material Adverse Effect, and either (A) enforcement
proceedings shall have been commenced by any Person upon such
judgment or order or (B) there shall be any period of 60
consecutive days during which a stay of enforcement of such
judgment or order by reason of a pending appeal or otherwise,
shall not be in effect; or
(vi) [Intentionally Omitted]
(vii) Any ERISA Event with respect to a Plan shall have
occurred and, 30 days after notice thereof shall have been given
to the Guarantor by the Agent, (A) such ERISA Event shall still
exist and (B) the sum (determined as of the date of occurrence of
such ERISA Event) of the Insufficiency of such Plan and the
Insufficiency of any and all other Plans with respect to which an
ERISA Event shall have occurred and then exist (or in the case of
a Plan with respect to which an ERISA Event described in clause
(iii) through (vi) of the definition of ERISA Event shall have
occurred and then exist, the liability related thereto) is equal
to or greater than 5% of the Guarantor's Consolidated Net Worth;
or
(viii) The Guarantor or any ERISA Affiliate shall have
been notified by the sponsor of a Multiemployer Plan that has
incurred Withdrawal Liability to such Multiemployer Plan in an
amount that, when aggregated with all other amounts required to
be paid to Multiemployer Plans by the Guarantor and its ERISA
Affiliates as Withdrawal Liability (determined as of the date of
such notification), exceeds 5% of the Guarantor's Consolidated
Net Worth; or
(ix) The Guarantor or any ERISA Affiliate shall have
been notified by the sponsor of a Multiemployer Plan that such
Multiemployer Plan is in reorganization or is being terminated,
within the meaning of Title IV of ERISA, if as a result of such
reorganization or termination the aggregate annual contributions
of the Guarantor and its ERISA Affiliates to all Multiemployer
Plans that are then in reorganization or being terminated have
been or will be increased over the amounts contributed to such
Multiemployer Plans for the respective plan year of each such
Multiemployer Plan immediately preceding the plan year in which
the reorganization or termination occurs by an amount exceeding
5% of the Guarantor's Consolidated Net Worth; or
(x) Any proceeding shall be instituted against the
Guarantor or any of its Subsidiaries which is likely (taking into
account the probability of an adverse determination and the
exhaustion of all appeals) to have a Material Adverse Effect; or
(xi) A Change of Control shall have occurred; or
(xii) An HMO Event which, if unremedied, is reasonably
likely to have a Material Adverse Effect shall have occurred and
remain unremedied for thirty days after the occurrence thereof
(or such lesser period of time, if any, as the HMO Regulator
administering the HMO Regulations shall have imposed for the cure
of such HMO Event; it being understood that if the Guarantor
reaches a written agreement with such HMO Regulator during such
thirty-day (or shorter) period which cures (or provides a means
for the cure of) such HMO Event to such HMO Regulator's
satisfaction, then no Event of Default shall exist under this
subsection (xii)); or
(xiii) Any Existing Credit Agreement Event of Default; or
(xiv) Any Lease Event of Default.
<PAGE>
(b) REMEDIES. Upon the occurrence of an Event of Default, then, and
in any such event, the Owner Trustee may by notice to the Guarantor declare
its obligations under the Operative Agreements to be terminated, whereupon
the same shall forthwith terminate, and the Owner Trustee shall have the
right to exercise its remedies in accordance with Article XVII of the Lease
and the Owner Trustee may, without the necessity of further action, call
upon the Guarantor for prompt payment and/or performance.
The Guarantor agrees that, as between the Guarantor, on the one hand,
and the Owner Trustee, on the other hand, the FHMS Obligations may be
declared to be forthwith due and payable as provided in the Lease (and
shall be deemed to have become automatically due and payable in the
circumstances provided in the Lease) for purposes of Section 2.01 hereof,
notwithstanding any stay, injunction or other prohibition preventing such
declaration (or such FHMS Obligations from becoming automatically due and
payable) as against any other Person and that, in the event of such
declaration (or such FHMS Obligations being deemed to have become
automatically due and payable), such FHMS Obligations (whether or not due
and payable by any other Person) shall forthwith become due and payable by
the Guarantor for purposes of said Section 2.01.
2.06 NO SUBROGATION; NO RECOURSE AGAINST OWNER TRUSTEE. Notwithstanding
the satisfaction by the Guarantor of any liability of the Guarantor hereunder,
the Guarantor shall not have any right of subrogation, contribution,
reimbursement or indemnity whatsoever or any right of recourse to or with
respect to the assets or property of FHMS or to any Property. In connection
with the foregoing, the Guarantor expressly waives any and all rights of
subrogation to the Owner Trustee against FHMS, and the Guarantor hereby waives
any rights to enforce any remedy which the Owner Trustee may have against FHMS
and any right to participate in any Property. Further, the Guarantor shall have
no right of recourse against the Owner Trustee by reason of any action that the
Owner Trustee may take or omit to take under the provisions of this Guaranty
Agreement or under the provisions of any of the Operative Agreements.
2.07 CONTINUING GUARANTEE. The guarantee in this Section 2 is a
continuing guarantee, and shall apply to all FHMS Obligations whenever arising.
<PAGE>
ARTICLE III
[INTENTIONALLY OMITTED]
<PAGE>
ARTICLE IV
REPRESENTATIONS, WARRANTIES AND COVENANTS
Reference is made to the representations and warranties contained in
Article IV of the Existing Credit Agreement (hereinafter referred to as the
"Incorporated Representations and Warranties") and the covenants contained in
Article V of the Existing Credit Agreement (hereinafter referred to as the
"Incorporated Covenants"). The Guarantor agrees with the Owner Trustee that the
Incorporated Representations and Warranties and the Incorporated Covenants (and
all other relevant provisions of the Existing Credit Agreement related thereto)
are hereby incorporated by reference into this Guaranty Agreement to the same
extent and with the same effect as if set forth fully herein, including without
limitation any and all waivers, amendments, modifications or replacements of the
Existing Credit Agreement or any term or provision of the Incorporated
Representations and Warranties and the Incorporated Covenants occurring
subsequent to the date of this Guaranty Agreement and the Guarantor further
agrees that the Incorporated Representations and Warranties shall be deemed to
be restated and made as of the date hereof and as of the date of each
Requisition. In the event a waiver is granted under the Existing Credit
Agreement or an amendment or modification is executed with respect to the
Existing Credit Agreement, and such waiver, amendment and/or modification
affects the Incorporated Representations and Warranties or the Incorporated
Covenants, then such waiver, amendment or modification shall automatically be
effective with respect to the Incorporated Representations and Warranties and
the Incorporated Covenants as incorporated by reference into this Guaranty
Agreement without further action. If any Lender is not a lender under the
Existing Credit Agreement, Guarantor shall deliver to such Lender a copy of the
waiver, amendment or modification affecting the Incorporated Representations or
Warranties or the Incorporated Covenants. In the event of any replacement of
the Existing Credit Agreement with a similar credit facility (the "New
Facility") then, if each of the Lenders are lenders under the New Facility, the
representations, warranties and covenants contained in the New Facility which
correspond to the representations, warranties and covenants contained in Article
IV and Article V of the Existing Credit Agreement shall automatically become
Incorporated Representations and Warranties and the Incorporated Covenants
hereunder without further action. If one or more of the Lenders is not a lender
under the New Facility, (i) the Guarantor shall deliver, or cause to be
delivered, a copy of the executed New Facility to each of the Lenders on or
prior to the effective date thereof and the Majority Lenders shall elect whether
(i) the representations, warranties and covenants contained in the New Facility
which correspond to the representations, warranties and covenants contained in
Article IV and Article V of the Existing Credit Agreement shall become the
Incorporated Representations and Warranties and the Incorporated Covenants
hereunder or (ii) the representations, warranties and covenants contained in
Article IV and Article V of the Existing Credit Agreement immediately prior to
such termination (as such may have been amended, modified, supplemented,
restated and/or replaced from time to time prior to the termination of the
Existing Credit Agreement) shall continue to be the Incorporated Representations
and Warranties and the Incorporated Covenants hereunder. If the Existing Credit
Agreement is terminated and not replaced, then the representations, warranties
and covenants contained in Article IV and Article V of the Existing Credit
Agreement immediately prior to such termination (as such may have been amended,
modified, supplemented, restated and/or replaced from time to time prior to such
termination) shall continue to be the Incorporated Representations and
Warranties and the Incorporated Covenants hereunder.
<PAGE>
ARTICLE V
MISCELLANEOUS
5.01 NOTICES. All notices, demands, requests, consents, approvals and
other communications hereunder shall be in writing and delivered personally or
by a nationally recognized overnight courier service or mailed (by ministered or
certified mail, return receipt requested, postage prepaid), addressed to the
respective parties, as follows:
if to the Guarantor:
Foundation Health Corporation
3400 Data Drive
Rancho Cordova, California 95670
Attn: Chief Financial Officer
Telephone: (916) 631-5000
Telecopy: (916) 631-5335
if to the Owner Trustee:
First Security Bank of Utah, N.A.
79 South Main Street
Salt Lake City, Utah 84111
Attn: Val T. Orton
Telephone: (801) 246-5300
Telecopy: (801) 246-5053
or such additional parties and/or other address as such party may hereafter
designate, and shall be effective upon receipt or refusal thereof.
5.02 BENEFIT OF AGREEMENT. This Guaranty Agreement shall be binding upon
and inure to the benefit of and be enforceable by the respective successors of
the parties hereto and the assignees of the Owner Trustee (which assignees
include the Agent and the Lenders pursuant to the terms of the Security
Agreement). The Guarantor shall not assign and transfer any of its rights or
obligations hereunder without the prior written consent of the Owner Trustee.
5.03 NO WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of
the Owner Trustee in exercising any right, power or privilege hereunder or under
any other Guarantor Document and no course of dealing between the Guarantor and
the Owner Trustee shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, power or privilege hereunder or under any other
Guarantor Document preclude any other or further exercise thereof or the
exercise of any other right, power or privilege hereunder or thereunder. The
rights and remedies provided herein are cumulative and not exclusive of any
rights or remedies which the Owner Trustee would otherwise have. No notice to
or demand on the Guarantor in any case shall entitle the Guarantor to any other
or further notice or demand in similar or other circumstances or constitute a
waiver of the rights of the Owner Trustee to any other or further action in any
circumstances without notice or demand.
5.04 PAYMENT OF EXPENSES, ETC. The Guarantor agrees to:
(a) pay all reasonable out-of-pocket costs and expenses of the Owner
Trustee, the Agent, the Lenders and the Holders in connection with any
amendment, waiver or consent relating to this Guaranty Agreement or any of
the Guarantor Documents which was requested by either the Guarantor or the
Lessee, and, in addition, pay all such costs and expenses related to any
such amendments, waivers or consents resulting from or related to any work-
out, renegotiation or restructure relating to the performance by the
Guarantor under this Guaranty Agreement and all such costs and expenses of
the Owner Trustee, the Agent, the Lenders and the Holders in connection
with enforcement of the Guarantor Documents (including, without limitation,
the reasonable fees and disbursements of counsel for the Owner Trustee, the
Agent, the Lenders and the Holders); and
(b) pay and hold harmless the Owner Trustee, the Agent, the Lenders
and the Holders from and against any and all present and future stamp and
other similar taxes with respect to the foregoing matters and hold harmless
the Owner Trustee, the Agent, the Lenders and the Holders from and against
any and all liabilities with respect to or resulting from any delay or
omission to pay such taxes.
<PAGE>
5.05 AMENDMENTS, WAIVERS AND CONSENTS. Neither Guarantor Document nor any
of the terms thereof may be amended, changed, waived, discharged or terminated
unless such amendment, change, waiver, discharge or termination is approved or
consented to in writing by the Owner Trustee. Any such amendment, change,
waiver, discharge or termination shall be effective only in the specific
instance and for the specific purpose for which given.
5.06 COUNTERPARTS. This Guaranty Agreement may be executed in any number
of counterparts, each of which when so executed and delivered shall be an
original, but all of which shall constitute one and the same instrument. It
shall not be necessary in making proof of this Guaranty Agreement to produce or
account for more than one such counterpart.
5.07 HEADINGS. The headings of the sections and subsections hereof are
provided for convenience only and shall not in any way affect the meaning or
construction of any provision of this Guaranty Agreement.
5.08 GOVERNING LAW. THIS GUARANTY AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.
5.09 SEVERABILITY. If any provision of any of the Guarantor Documents is
determined to be illegal, invalid or unenforceable, such provision shall be
fully severable and the remaining provisions shall remain in full force and
effect and shall be construed without giving effect to the illegal, invalid or
unenforceable provisions.
5.10 ENTIRETY. This Guaranty Agreement together with the other Guarantor
Documents represent the entire agreement of the parties hereto and thereto, and
supersedes all prior agreements and understandings, oral or written, if any,
including any commitment letters or correspondence relating to the Guarantor
Documents or the transactions contemplated herein and therein.
IN WITNESS WHEREOF, the Guarantor has caused a counterpart of this Guaranty
Agreement to be duly executed under seal and delivered as of the date first
above written.
FOUNDATION HEALTH CORPORATION
By:
----------------------------------------------
Name:
--------------------------------------------
Title:
-------------------------------------------
Accepted:
FIRST SECURITY BANK OF
UTAH, N.A., not individually
but solely as Owner Trustee
under the FH Trust 1995-1
By:
---------------------------
Name:
-------------------------
Title:
------------------------
<PAGE>
AMENDED AND RESTATED
DEFERRED-COMPENSATION PLAN OF
FOUNDATION HEALTH CORPORATION
SECTION 1. ESTABLISHMENT AND PURPOSE.
The Plan was adopted by the Board on June 6, 1991 and was most recently
amended and restated effective April 25, 1995. The Plan is intended to provide
Eligible Participants with an opportunity to defer payment of a portion of their
salaries, directors' fees and consulting fees and of any bonus awards they
receive under the Company's bonus program. Deferred amounts will be credited
with interest. In addition, the Plan provides for matching contributions by the
Company for Designated Eligible Employees.
SECTION 2. DEFINITIONS.
(a) "ACCOUNT" means a bookkeeping account established pursuant to Section
6(a) for Compensation that is subject to an Eligible Participant's deferral
election and for any matching contributions by the Company for Designated
Eligible Employees.
(b) "BASE SALARY" means the annual compensation, excluding bonuses,
commissions, overtime, relocation expenses, automobile allowances, incentive
payments, non-monetary awards, directors fees and other fees, paid to an
Eligible Employee for employment services rendered to the Company or a
subsidiary of the Company, before reduction for compensation deferred pursuant
to all qualified, non-qualified and Code Section 125 plans of the Company.
(c) "BENEFICIARY" means the person or persons designated by the Eligible
Participant or by the Plan under Section 9(b) to receive payment of the Eligible
Participant's Account in the event of his or her death.
(d) "BOARD" means the Board of Directors of the Company, as constituted
from time to time.
(e) "CODE" means the Internal Revenue Code of 1986, as amended from time
to time.
(f) "COMMITTEE" means the Compensation and Organizational Committee of
the Board, as constituted from time to time.
(g) "COMPANY" means Foundation Health Corporation, a Delaware corporation.
(h) "COMPENSATION" means the sum of (i) the amount paid by the Company or
a subsidiary of the Company to an Eligible Employee as a bonus award under the
Company's bonus program, (ii) the amount of the Eligible Employee's Base Salary
and (iii) in the case of an Eligible Board Member, the amount of his or her
director's fees and consulting fees from the Company (including, without
limitation, annual retainers and meeting fees, but not including expense
reimbursements).
<PAGE>
(i) "DESIGNATED ELIGIBLE EMPLOYEE" means an Eligible Employee who is
entitled to a matching contribution from the Company.
(j) "DEDUCTION LIMITATION" means the following described limitation on the
annual benefit that may be distributed pursuant to the provisions of this Plan.
Except as otherwise provided, this limitation shall be applied to all
distributions under this Plan. If the Company determines in good faith prior to
a Change of Control that there is a reasonable likelihood that any compensation
paid to an Eligible Participant for a taxable year of the Company would not be
deductible by the Company solely by reason of the limitation under Code Section
162(m), then to the extent deemed necessary by the Company to ensure that the
entire amount of any distribution to the Eligible Participant pursuant to this
Plan prior to the Change of Control is deductible, the Company may defer all or
any portion of a distribution under this Plan. The amounts so deferred shall be
distributed to the Eligible Participant or his or her Beneficiary (in the event
of the Eligible Participant's death) at the earliest possible date, as
determined by the company in good faith, on which the deductibility of
compensation paid or payable to the Eligible Participant for the taxable year of
the Company during which the distribution is made will not be limited by Section
162(m), or if earlier, the effective date of a Change of Control.
(k) "ELECTION PERIOD" means (i) the month of December of each Year and
(ii) in the case of a new or rehired Eligible Employee or a newly elected
Eligible Board Member, the 30-day period commencing on the date when he or she
becomes an Eligible Participant.
(l) "ELIGIBLE BOARD MEMBER" means a member of the Board.
(m) "ELIGIBLE EMPLOYEE" means an employee of the Company or a subsidiary
of the Company who is eligible to participate in the Plan under Section 3.
(n) "ELIGIBLE PARTICIPANT" means an Eligible Board Member or an Eligible
Employee.
(o) "401(K) PLAN" means the Foundation Health Corporation Profit Sharing
and 401(k) Plan, as amended from time to time.
(p) "PLAN" means this Amended and Restated Deferred-Compensation Plan of
Foundation Health Corporation, as amended from time to time.
(q) "TOTAL DISABILITY" means that the Eligible Participant is unable to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted, or can be expected to last, for a continuous period
of not less than six months.
<PAGE>
(r) "TRUST" means the trust established pursuant to that certain Trust
Agreement, dated as of July 1, 1994, between the Company and the trustee named
therein, as amended from time to time.
(s) "UNFORESEEABLE FINANCIAL EMERGENCY" means an unanticipated emergency
that is caused by an event beyond the control of an Eligible Participant that
would result in severe financial hardship to the Eligible Participant resulting
from (i) a sudden and unexpected illness or accident of the Eligible Participant
or a dependent of the Eligible Participant, (ii) loss of the Eligible
Participant's property due to casualty or (iii) such other extraordinary and
unforeseeable circumstances arising as a result of events beyond the control of
the Eligible Participant, all as determined in the sole discretion of the
Committee.
(t) "YEAR" means a calendar year.
SECTION 3. ELIGIBILITY.
Any member of the Board shall be eligible to participate in the Plan and
shall be deemed to be an Eligible Board Member. A common-law employee of the
Company, or of any of its direct or indirect subsidiaries, shall be eligible to
participate in the Plan as an Eligible Employee if:
(a) His or her total annualized Base Salary from the Company or
a subsidiary for the calendar year in which the deferral election is
made will not be less than $75,000 and, commencing with the 1996
calendar year, shall not be less than $120,000; or
(b) He or she has expressly been designated as an Eligible
Employee by the Committee.
Furthermore, no individual shall participate if his or her participation
would cause the Plan to fail to be a plan that is maintained primarily for the
purpose of providing deferred compensation for a select group of management or
highly compensated employees, within the meaning of sections 201(2), 301(a)(3)
and 401(1) of ERISA.
SECTION 4. ELECTION TO PARTICIPATE IN PLAN.
(a) An Eligible Participant may elect to participate in the Plan by filing
a written election of deferral of Compensation with the Company during any
Election Period. Such election shall apply to all Compensation to be paid in
payroll periods commencing after the close of such Election Period. The
election shall specify the percentage of the Eligible Participant's Compensation
to which it applies, separately as respect to Base Salary and bonus, which may
be any whole percentage between 1% and 90% of such Base Salary and bonus (so
long as the amount of Base Salary and bonus not deferred is sufficient to fund
the Eligible Participant's tax and employee benefit obligations). An Eligible
Participant may change his or her deferral percentage (or reduce it to zero) by
filing a new deferral election with the Company during any Election Period. The
change shall be effective with respect to all Compensation to be paid in payroll
periods commencing after the close of such Election Period.
<PAGE>
(b) All deferral elections under this Section 4 shall be made on the
form(s) prescribed for this purpose by the Company.
SECTION 5. MATCHING CONTRIBUTIONS.
(a) The Company shall credit the Account of each participating Designated
Eligible Employee with a matching contribution, as of the end of each calendar
month to which an election to participate under Section 4(a) applies. A
Designated Eligible Employee shall be an Eligible Employee whose Base Salary for
the calendar year in which the deferral election is made will not be less than
$100,000 and, commencing with the 1996 calendar year, shall not be less than
$120,000. The amount of the matching contribution under this Plan shall be
equal to the amount of Compensation deferred by the Designated Eligible Employee
under Section 4 of this Plan for the calendar month, but only to the extent that
such amount does not exceed 10% of the Designated Eligible Employee's
Compensation for such month. Notwithstanding the preceding sentence, in no
event will the aggregate matching contributions for the Year exceed 10% of the
Designated Eligible Employee's Compensation for the Year.
(b) Subsection (a) above notwithstanding, matching contributions credited
under this Plan (and the interest credited thereon under Section 7(a)) shall be
distributed to the Designated Eligible Employee under Section 8 only to the
extent that such matching contributions (and interest) would be vested under the
401(k) Plan's vesting schedule. The balance, if any, of such matching
contributions (and interest) shall be forfeited upon the termination of the
Eligible Employee's employment. In the event that the Designated Eligible
Employee is reemployed by the Company or one of its subsidiaries, the amount so
forfeited shall be restored to his or her Account to the extent that such amount
would be restored under the 401(k) Plan.
SECTION 6. ESTABLISHMENT OF ACCOUNTS.
(a) The Company shall establish an Account for each Eligible Participant
who has duly filed a deferral election with respect to his or her Compensation.
An Eligible Participant shall have only one Account.
(b) An Eligible Participant's Account shall be credited with an amount
equal to that percentage of each Compensation payment which would have been
payable currently to the Eligible Participant but for the terms of the deferral
election. Deferred Compensation shall be credited to the Eligible Participant's
Account as soon as reasonably practicable after the applicable payment date.
The Company's matching contributions under Section 5 to Designated Eligible
Participants shall also be credited to the Accounts of the appropriate
Designated Eligible Participants.
<PAGE>
SECTION 7. TREATMENT OF ACCOUNTS DURING DEFERRAL PERIOD.
(a) Interest shall be credited on the ending balance in each Account as of
the close of each calendar month. The interest shall become a part of the
Account and shall be paid at the same time or times as the balance of the
Account. The interest for each month during the deferral period shall be at a
rate equal to (i) for the period prior to May 1, 1994, the weighted average of
the reference rates announced from time to time during such month by Citibank
N.A. plus 1/4 of 1% and (ii) for the period beginning July 1, 1994, 140% of
Moody's Seasoned Corporate Bond Rate as of the last day of the month. The
interest shall be compounded monthly.
(b) As soon as reasonably practicable after the close of each calendar
quarter (and after such other dates as the Committee may determine), the Company
shall prepare and deliver to each Eligible Participant who has an Account a
written statement showing the amount credited to such Account as of the
applicable date.
SECTION 8. FORM AND TIME OF PAYMENT OF ACCOUNTS.
(a) Payment of an Account shall be made in such increments and commencing
at such time as the Eligible Participant shall specify in writing on his or her
deferral election form. The amount of any installment to be paid from an
Account, unless otherwise permitted, shall be determined by dividing the
balance remaining in such Account by the number of installments then remaining
to be distributed from such Account.
(b) Participants designated by the Chief Financial Officer of the Company
from time to time shall have the ability to elect payment of an Account other
than the standard payments (described in subsection (a) above), which
permissible Account payments shall include payment in a lump sum or in monthly,
quarterly or annual installments over such period of years (not exceeding 20
years) as specified in the election form.
(c) Prior to the time of payment specified by the Eligible Participant on
his or her deferral election form, the Eligible Participant may elect to change
the terms of payment of his or her Account, provided that such change does not
accelerate payments from such Account under any circumstances. Any such change
shall be in writing and shall be effective upon receipt by the Company.
(d) In the event of the Eligible Participant's Total Disability, the
Committee may determine in its sole discretion that payment of the Eligible
Participant's Account shall be made in a different form or at an earlier date
than the time or times specified on his or her deferral election form.
(e) In the event of an Eligible Participant's Unforeseeable Emergency,
subject to the prior approval of the Committee, the Eligible Participant may
elect to receive a distribution of the portion of his or her Account (up to
100%) that is necessary to meet the Eligible Participant's emergency need.
(f) Subject to the prior approval of the Committee, an Eligible
Participant may elect to receive a lump sum distribution from the Plan of 90% of
his or her Account, at any time and for any reason; provided, however, that the
remaining 10% of the Eligible Participant's Account shall be irrevocably
forfeited. After making a withdrawal under this Section 8(f), the Eligible
Participant shall cease participating, shall never be eligible to resume
participation in the Plan and shall not be entitled to any further benefits
under the Plan.
<PAGE>
SECTION 9. EFFECT OF DEATH OF PARTICIPANT.
(a) Upon the death of an Eligible Participant, the amount (if any)
remaining in his or her Account shall be distributed to his or her Beneficiary.
The distribution(s) shall be made at the time when the distribution(s) to the
Eligible Participant would have been made, unless the Committee determines in
its sole discretion that payment(s) shall be made at an earlier date.
(b) Upon commencement of participation, each Eligible Participant shall,
by filing the prescribed form with the Company, name a person or persons as the
Beneficiary who will receive any distribution payable under the Plan in the
event of the Eligible Participant's death. If the Eligible Participant has not
named a Beneficiary or if none of the named Beneficiaries is living when any
payment is to be made, then (i) the spouse of the deceased Eligible Participant
shall be the Beneficiary or (ii) if the Eligible Participant has no spouse
living at the time of such payment, the then living children of the deceased
Eligible Participant shall be the Beneficiaries in equal shares or (iii) if the
Eligible Participant has neither spouse nor children living at the time of such
payment, the estate of the Eligible Participant shall be the Beneficiary. The
Eligible Participant may change the designation of a Beneficiary from time to
time in accordance with procedures established by the Company. Any designation
of a Beneficiary (or an amendment or revocation thereof) shall be effective only
if it is made in writing on the prescribed form and is received by the Company
prior to the Eligible Participant's death.
SECTION 10. WITHHOLDING TAXES.
All distributions under the Plan shall be subject to reduction to reflect
any withholding tax obligations imposed by law. The Company shall withhold from
the Eligible Participants Base Salary or bonus, as applicable, any FICA or other
employment tax obligations as they become due.
SECTION 11. PARTICIPANT'S RIGHTS UNSECURED.
The interest under the Plan of any participating Eligible Participant, and
such Eligible Participant's right to receive a distribution from his or her
Account, shall be an unsecured claim against the general assets of the Company.
The Accounts shall be unfunded bookkeeping entries only. No Eligible
Participant shall have an interest in or claim against any specific asset of the
Company pursuant to the Plan.
SECTION 12. NONASSIGNABILITY OF INTERESTS.
The interest and property rights of an Eligible Participant under the Plan
shall not be subject to option nor be assignable either by voluntary or
involuntary assignment or by operation of law, including (without limitation)
bankruptcy, garnishment, attachment or other creditor's process, and any act in
violation of this Section 12 shall be void.
<PAGE>
SECTION 13. LIMITATION OF RIGHTS.
(a) Nothing in the Plan shall be construed to give any Eligible Employee
any right to be granted a bonus award.
(b) Neither the Plan nor the deferral of any Compensation, nor any other
action taken pursuant to the Plan, shall constitute or be evidence of any
agreement or understanding, express or implied, that the Company or any
subsidiary of the Company will employ an Eligible Employee for any period of
time, in any position or at any particular rate of compensation. The Company
and its subsidiaries reserve the right to terminate an Eligible Employee's
employment at any time and for any reason, with or without cause, except as
otherwise expressly provided in a written employment agreement.
SECTION 14. ADMINISTRATION OF THE PLAN.
The Plan shall be administered by the Committee. The Committee shall have
full power, authority and discretion to administer and interpret the Plan, to
establish procedures for administering the Plan, to prescribe forms and to take
any and all necessary actions in connection with the Plan. The Committee's
interpretation and construction of the Plan shall be conclusive and binding on
all persons. For purposes of the Plan, "Change of Control" shall have the
meaning set forth in the agreement governing the Trust.
SECTION 15. AMENDMENT OR TERMINATION OF THE PLAN.
The Committee may amend, suspend or terminate the Plan at any time, with
the vote of 80% of the participants entitled to benefits hereunder, and
expressly reserves the right to change the interest rate set forth in Section
7(a) on a prospective basis. In the event of a termination, the Accounts of
Eligible Participants shall be paid at such time and in such form as shall be
determined pursuant to Section 8, unless the Committee prescribes an earlier
time or different form for the payment of such Accounts.
SECTION 16. TRUST
(a) The Company shall establish the Trust, and the Company shall transfer
over to the Trust each year such assets as are necessary to provide for the
Company's future liabilities created with respect to the Plan for such year, in
accordance with the provisions of the Trust.
(b) The provisions of the Plan shall govern the rights of a Eligible
Participant to receive distributions pursuant to the Plan. The provisions of the
Trust shall govern the rights of the Company, Eligible Participants and the
creditors of the Company to the assets transferred to the Trust. The Company
shall at all times remain liable to carry out its obligations under the Plan.
The Company's obligations under the Plan may be satisfied with Trust assets
distributed pursuant to the terms of the Trust, and any such distribution shall
reduce the Company's obligations under this Plan.
SECTION 17. LIMITATION ON PAYMENTS.
(a) Any other provision of the Plan notwithstanding, the Company shall
not be required to make any payment or transfer any property to, or for the
benefit of, the Eligible Participants (under this Plan or otherwise) that would
be nondeductible by the Company by reason of section 280G of the Code or that
would subject the Eligible Participants to the excise tax described in section
4999 of the Code. All calculations required by this section shall be performed
by the Company's independent auditors selected by the Board of Directors prior
to a Change of Control ("Auditors"), based on information supplied by the
Company and the Eligible Participants and shall be binding on the Company and
the Eligible Participants. All fees and expenses of the Auditors to determine
such amounts shall be paid by the Company.
<PAGE>
(b) If the amount of the aggregate payments or property transfers to an
Eligible Participant must be reduced under this section, then such Eligible
Participant shall direct in which order the payments or transfers are to be
reduced, but no change in the timing of any payment or transfer shall be made
without the Company's consent. As a result of uncertainty in the application of
sections 280G and 4999 of the Code at the time of an initial determination by
the Auditors hereunder, it is possible that a payment will have been made by the
Company that should not have been made (an "Overpayment") or that an additional
payment will not have been made by the Company that could have been made (an
"Underpayment"). In the event that the Auditors, based upon the assertion of a
deficiency by the Internal Revenue Service against the Company or the Eligible
Participants that the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Eligible Participant that he shall repay to
the Company, together with interest at the applicable federal rate specified in
section 7872(f)(2) of the Code; provided, however, that no amount shall be
payable by the Eligible Participant to the Company if and to the extent that
such payment would not reduce the amount that is nondeductible under section
280G of the Code or is subject to an excise tax under section 4999 of the Code.
In the event that the Auditors determine that an Underpayment has
occurred, such Underpayment shall promptly be paid or transferred by the Company
to, or for the benefit of, the Eligible Participant, together with interest at
the applicable federal rate specified in section 7872(f)(2) of the Code.
SECTION 18. CHOICE OF LAW AND CLAIMS PROCEDURE.
(a) The validity, interpretation, construction and performance of the Plan
shall be governed by the Employee Retirement Income Security Act of 1974 and, to
the extent they are not preempted, by the laws of the State of California.
(b) In accordance with the regulations of the U.S. Secretary of Labor, the
Committee shall (i) provide adequate notice in writing to any Eligible
Participant or Beneficiary whose claim for benefits under the Plan has been
denied, setting forth the specific reasons for such denial and written in a
manner calculated to be understood by such Eligible Participant or Beneficiary,
and (ii) afford a reasonable opportunity to any Eligible Participant or
Beneficiary whose claim for benefits has been denied for a full and fair review
by the Board of the decision denying the claim.
SECTION 19. MISCELLANEOUS
(a) The interest in the benefits hereunder of a spouse of a Eligible
Participant who has predeceased the Eligible Participant shall automatically
pass to the Eligible Participant and shall not be transferable by such spouse in
any manner, including but not limited to such spouse's will, nor shall such
interest pass under the laws of intestate succession.
(b) The Committee is authorized to make any payments directed by court
order in any action in which the Plan or the Committee has been named as party.
(c) The Company is aware that upon the occurrence of a Change of Control,
the Board (which might then be composed of new members) or a stockholder of the
Company, or of any successor corporation might then cause or attempt to cause
the Company or such successor to refuse to comply with its obligations under the
Plan and might cause or attempt to cause the Company to institute, or may
institute, litigation seeking to deny Participants the benefits intended under
the Plan. In these circumstances, the purpose of the Plan could be frustrated.
Accordingly, if, following a Change of Control, it should appear to any Eligible
Participant that the Company has failed to comply with any of its obligations
under the Plan or any agreement thereunder or, if the Company or any other
person takes any action to declare the Plan void or unenforceable or institutes
any litigation or other legal action designed to deny, diminish or to recover
from any Eligible Participant the benefits intended to be provided hereunder,
then the Company irrevocably authorizes such Eligible Participant to retain
counsel of his or her choice at the expense of the Company to represent such
Eligible Participant in connection with the initiation or defense of any
litigation or other legal action, whether by or against the Company or any
director, officer, stockholder or other person affiliated with the Company or
any successor thereto in any jurisdiction.
SECTION 20. EXECUTION.
To record the adoption of the amended and restated Plan by the Committee,
effective April 25, 1995, the Company has caused its duly authorized officer to
affix the corporate name hereto.
FOUNDATION HEALTH CORPORATION
By
---------------------------------
Daniel D. Crowley, Chairman, President
and Chief Executive Officer
<PAGE>
FOUNDATION HEALTH CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(As Amended and Restated Effective April 25, 1995)
SECTION 1. INTRODUCTION.
The Foundation Health Corporation Supplemental Executive Retirement Plan
was established effective July 1, 1994, and it was amended and restated
effective April 25, 1995. The purpose of the Plan is to supplement retirement
benefits provided to designated executives of the Company. The Plan is intended
to be an unfunded plan maintained primarily for the purpose of providing
deferred compensation for a select group of management or highly compensated
employees, as described in section 401(a)(1) of ERISA.
SECTION 2. DEFINITIONS.
(a) "BASE SALARY" shall mean the annual compensation, excluding bonuses,
commissions, overtime, relocation expenses, automobile allowances, incentive
payments, non-monetary awards, directors fees and other fees, paid to a
Participant for employment services rendered to the Company or a subsidiary,
before reduction for compensation deferred pursuant to all qualified, non-
qualified and Code Section 125 plans of the Company.
(b) "BENEFICIARY" shall mean the person or persons designated by a
Participant to receive payment of benefits under the Plan in the event of his or
her death. If more than one Beneficiary is named, the Participant may specify
the sequence (i.e., primary or contingent) and/or proportion in which payments
shall be made to each Beneficiary. If a Participant is
married, he or she may not designate a primary Beneficiary other than his or her
spouse without the written consent of his or her spouse witnessed by a notary.
(c) "CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
(d) "COMMITTEE" shall mean the Compensation and Organizational Committee
of the Board of Directors of the Company, as constituted from time to time.
(e) "COMPANY" shall mean Foundation Health Corporation, a Delaware
corporation.
<PAGE>
(f) "DEDUCTION LIMITATION" shall mean the following described limitation
on the annual benefit that may be distributed pursuant to the provisions of this
Plan. Except as otherwise provided, this limitation shall be applied to all
distributions under this Plan. If the Company determines in good faith prior to
a Change of Control that there is a reasonable likelihood that any compensation
paid to a Participant for a taxable year of the Company would not be deductible
by the Company solely by reason of the limitation under Code Section 162(m),
then to the extent deemed necessary by the Company to ensure that the entire
amount of any distribution to the Participant pursuant to this Plan prior to the
Change of Control is deductible, the Company may defer all or any portion of a
distribution under this Plan. The amounts so deferred shall be distributed to
the Participant or his or her Beneficiary (in the event of the Participant's
death) at the earliest possible date, as determined by the Company in good
faith, on which the deductibility of compensation paid or payable to the
Participant for the taxable year of the Company during which the distribution is
made will not be limited by Section 162(m), or if earlier, the effective date of
a Change of Control.
(g) "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time.
(h) "FINAL BASE SALARY" shall mean the Participant's highest Base Salary
in effect during the five calendar years prior to termination of employment with
the Company. If the Participant has less than five complete calendar year(s) of
employment with the Company, then the Participant's Final Base Salary shall be
the highest of his or her Base Salary in his or her complete calendar year(s) of
employment.
(i) "HOUR OF SERVICE" means each hour for which an individual is directly
or indirectly paid or entitled to payment for the performance of duties for the
Company or a subsidiary of the Company; provided, however, that service with a
subsidiary that was acquired by the Company shall be disregarded to the extent
such service was performed prior to the date of such acquisition. For purposes
of determining a Participant's vested percentage under Section 4, a Participant
shall be credited with 190 Hours of Service for each month in which a
Participant is totally and permanently disabled and not engaged in any
employment.
(j) "PARTICIPANT" means an executive of the Company listed in Appendix A,
as amended from time to time.
(k) "PLAN" means this Foundation Health Corporation Supplemental Executive
Retirement Plan, as amended from time to time.
(l) "PLAN BENEFIT" means the annual Plan Benefit specified in Section 5.
(m) "RETIREMENT BENEFIT" means a Normal Retirement Benefit under Section
7(a) or an Early Retirement Benefit under Section 7(b).
(n) "TRUST" shall mean the trust established pursuant to that certain
Trust Agreement, dated as of July 1, 1994, between the Company and the trustee
named therein, as amended from time to time.
(o) "YEAR OF SERVICE" means a calendar year after 1988 in which an
individual completes 1,000 Hours of Service.
SECTION 3. PARTICIPATION.
All executives of the Company designated in Appendix A shall participate in
the Plan; provided, however, that no executive shall participate until he or she
elects to receive his or her Retirement Benefit in the form of either (i)
annuity payments under either Subsection 7(c)(i) or 7(c)(ii), as applicable or
(ii) a lump sum distribution under Subsection 7(c)(iii). Furthermore, no
executive shall participate if his or her participation would cause the Plan to
fail to be a plan that is maintained primarily for the purpose of providing
deferred compensation for a select group of management or highly compensated
employees, within the meaning of sections 201(2), 301(a)(3) and 401(a)(1) of
ERISA.
<PAGE>
SECTION 4. VESTING.
A Participant's vested percentage shall be determined in accordance with
the following schedule:
<TABLE>
<CAPTION>
YEARS OF SERVICE VESTED PERCENTAGE
---------------- -----------------
<S> <C>
less than 5 0%
5 50%
6 60%
7 70%
8 80%
9 90%
10 or more 100%
</TABLE>
SECTION 5. AMOUNT OF PLAN BENEFITS.
A Participant's annual Plan Benefit shall be equal to the Participant's
Final Base Salary multiplied by (i) the Participant's vested percentage and
(ii) 70% (as adjusted for distributions prior to age 60 in accordance with
Section 7(b)).
SECTION 6. PRE-RETIREMENT SURVIVOR BENEFITS.
If a married Participant dies prior to the termination of his or her
employment with the Company and its subsidiaries, the Participant's surviving
spouse shall receive monthly payments from the Company for life, commencing on
the date of the Participant's death, equal to 66-2/3 of the monthly Retirement
Benefit that the Participant would have received had the Participant terminated
employment on the date of his or her death and commenced a Retirement Benefit on
the later of (i) the date of the Participant's death and (ii) the date the
Participant would have attained age 55. In addition, if the surviving spouse
dies before 180 of such monthly payments have been made, the Participant's
contingent Beneficiary shall receive the balance of the 180 payments.
If an unmarried Participant dies prior to the termination of his or her
employment with the Company and its subsidiaries, his or her Beneficiary shall
receive 180 monthly payments from the Company, commencing on the date of the
Participant's death, equal to 66-2/3 of the monthly Retirement Benefit that the
Participant would have received had the Participant terminated employment on the
date of his or her death and commenced a Retirement Benefit on the later of (i)
the date of the Participant's death and (ii) the date the Participant would have
attained age 55.
<PAGE>
SECTION 7. DISTRIBUTIONS OF PLAN BENEFITS FOLLOWING TERMINATION OF EMPLOYMENT.
(a) NORMAL RETIREMENT. A Participant's monthly "Normal Retirement
Benefit" is equal to his or her Plan Benefit divided by 12. A Participant who
terminates employment with the Company and its subsidiaries on or after
attaining age 60 and completing at least 5 Years of Service shall receive a
Normal Retirement Benefit commencing as soon as practicable following
termination of employment, in the form specified under Paragraph (c) below.
(b) EARLY RETIREMENT. A Participant's monthly "Early Retirement Benefit"
is equal to his or her Plan Benefit, calculated by reducing the 70% factor set
forth in Section 5 by two percentage points for each year that distribution
commences before the Participant has attained age 60, divided by 12. A
Participant who terminates employment with the Company and its subsidiaries
prior to attaining age 60 and after completing at least 5 Years of Service
shall receive an Early Retirement Benefit commencing as soon as practicable
following the later of the date the Participant attains age 55 or the date of
the Participant's termination of employment, in the form specified under
Paragraph (c) below.
(c) FORMS OF DISTRIBUTION.
1. ANNUITY PAYMENTS TO UNMARRIED PARTICIPANTS. A Participant
who is unmarried on the date as of which payment of his or her
Retirement Benefit is to commence and who has elected annuity
payments pursuant to Section 3 shall receive his or her
Retirement Benefit in the form of a 15 year certain and life
annuity under which the Participant shall receive monthly pay-
ments from the Company equal to the Participant's Retirement
Benefit for his or her life and, if the Participant dies before
receiving 180 payments, the Participant's Beneficiary shall
receive the balance of the 180 payments.
2. ANNUITY PAYMENTS TO MARRIED PARTICIPANTS. A Participant who
is married on the date as of which payment of his or her
Retirement Benefit is to commence and who has elected annuity
payments pursuant to Section 3 shall receive his or her
Retirement Benefit in the form of a 15 year certain joint and
survivor annuity under which (A) the Participant shall receive
monthly payments from the Company equal to the Participant's
Retirement Benefit for his or her life, (B) if the Participant
dies before receiving 180 payments and is not survived by his or
her spouse, the Participant's Beneficiary shall receive monthly
payments from the Company equal to 66-2/3 of the Participant's
Retirement Benefit for the balance of the 180 payments, (C) if
the Participant dies and is survived by his or her spouse, the
Participant's surviving spouse shall receive monthly payments
from the Company equal to 66-2/3 of the Participant's Retirement
Benefit for his or her life and (D) if the Participant dies and
is survived by his or her spouse, and if the surviving spouse
dies before 180 payments have been made to the Participant and/or
to the surviving spouse, the Participant's contingent Beneficiary
shall receive monthly payments from the Company equal to 66-2/3
of the Participant's Retirement Benefit for the balance of the
180 payments.
<PAGE>
3. LUMP SUM DISTRIBUTION. A Participant who has elected a lump
sum distribution pursuant to Section 3 shall receive a single
lump sum payment in cash equal to the actuarial equivalent of his
or her Retirement Benefit (calculated as if such Participant were
unmarried). If a lump sum distribution is elected, no benefits
shall be payable from the Plan upon the Participant's death
(other than a payment of the lump sum distribution to the Benefi-
ciary of the Participant in the event that the Participant dies
after electing a lump sum and before receiving payment).
4. CHANGE OF DISTRIBUTION OPTION. Subject to the prior
approval of the Committee, a Participant may change the election
of the form of distribution made pursuant to Section 3 at any
time prior to the commencement of his or her Retirement Benefit
under the Plan; however, in no event may such change of election
be made less than one-year prior to commencement of benefits.
SECTION 8. LUMP SUM WITHDRAWALS.
A Participant (who has completed at least 5 Years of Service) who has not
yet terminated employment with the Company and its subsidiaries, or a
Participant who has terminated employment with the Company and its subsidiaries
and elected to receive annuity payments pursuant to Section 3, may elect to
receive a lump sum distribution from the Plan at any time and for any reason.
The amount of the Participant's lump sum distribution shall be equal to 90% of
the actuarial equivalent of his or her Retirement Benefit (determined as if the
Participant were unmarried, and actuarially reduced to take into account any
prior distributions of the Participant's Retirement Benefit under the Plan);
provided, however, that the remaining 10% of the Participant's Retirement
Benefit shall be irrevocably forfeited. After making a withdrawal under this
Section 8, the Participant shall cease participating, shall never be eligible to
resume participation in the Plan and shall receive no further benefits under the
Plan.
SECTION 9. WITHHOLDING TAXES.
All distributions under the Plan shall be subject to reduction to reflect
any withholding tax obligations imposed by law. As the Participant becomes
vested in his Retirement Benefits, the Company shall pay on his behalf any FICA
or other employment tax obligations then becoming due; provided, further the
Company shall pay to the Participant additional compensation in the year in
which such payments are made to equal the Participant's federal, state and local
tax liability, if any, as a result of the payment of such FICA or other tax
obligations at the highest marginal federal and state tax rate.
SECTION 10. PARTICIPANT'S RIGHTS UNSECURED.
The interest under the Plan of any Participant, surviving spouse or
Beneficiary shall be an unsecured claim against the general assets of the
Company. No Participant, surviving spouse or Beneficiary shall have an interest
in or claim against any specific asset of the Company pursuant to the Plan.
SECTION 11. NONASSIGNABILITY OF INTERESTS.
The interest and property rights of a Participant, surviving spouse or
Beneficiary under the Plan shall not be subject to option nor be assignable
either by voluntary or involuntary assignment or by operation of law, including
(without limitation) bankruptcy, garnishment, attachment or other creditor's
process, and any act in violation of this Section 11 shall be void.
<PAGE>
SECTION 12. LIMITATION OF RIGHTS.
Neither the Plan nor any other action taken pursuant to the Plan shall
constitute or be evidence of any agreement or understanding, express or implied,
that the Company or any subsidiary of the Company will employ a Participant for
any period of time, in any position or at any particular rate of compensation.
The Company and its subsidiaries reserve the right to terminate a Participant's
employment at any time and for any reason, except as otherwise expressly
provided in a written employment agreement.
SECTION 13. ADMINISTRATION OF THE PLAN.
The Plan shall be administered by the Committee. The Committee shall have
full power, authority and discretion to administer and interpret the Plan, to
establish procedures for administering the Plan, to prescribe forms and to take
any and all necessary actions in connection with the Plan. The Committee's
interpretation and construction of the Plan shall be conclusive and binding on
all persons.
Determinations of actuarial equivalence shall be made by an actuary
employed by a nationally recognized actuarial firm selected either (i) prior to
a Change of Control by the Company or (ii) after a Change of Control by the
Board of Directors of the Company as constituted immediately prior to the Change
of Control. For purposes of the Plan, "Change of Control" shall have the
meaning set forth in the agreement governing the Trust.
Determinations of actuarial equivalence shall be made using an interest
rate no greater than the Moody's AAA Bond Rate and using a mortality table no
less favorable than the UP-1984 mortality table.
SECTION 14. AMENDMENT OR TERMINATION OF THE PLAN.
The Committee may amend, suspend or terminate the Plan at any time, but
only with the vote of 80% of the Participants entitled to benefits hereunder;
provided that no amendment, suspension or termination shall reduce an
individual's benefits under the Plan that were earned as of the date immediately
prior to such amendment, suspension or termination.
SECTION 15. TRUST.
(a) ESTABLISHMENT OF THE TRUST. The Company shall establish the Trust,
and the Company shall transfer over to the Trust each year such assets as are
necessary to provide for the Company's future liabilities created with respect
to the Plan for such year, in accordance with the provisions of the Trust.
(b) INTERRELATIONSHIP OF THE PLAN AND THE TRUST. The provisions of the
Plan shall govern the rights of a Participant or Beneficiary to receive
distributions pursuant to the Plan. The provisions of the Trust shall govern
the rights of the Company, Participants, Beneficiaries and the creditors of the
Company to the assets in the Trust. The Company shall at all times remain
liable to carry out its obligations under the Plan. The Company's obligations
under the Plan may be satisfied with Trust assets distributed pursuant to the
terms of the Trust, and any such distribution shall reduce the Company's
obligations under this Plan.
SECTION 16. CHANGE OF CONTROL.
If during the term of this Agreement, a Change of Control occurs with
respect to the Company, the vested percentage determined under Section 4 shall
be 100% for all Participants who have completed the minimum vesting requirement
of at least 5 Years of Service as of the date of the Change of Control.
SECTION 17. LIMITATION ON PAYMENTS.
(a) BASIC RULE. Any other provision of the Plan notwithstanding, the
Company shall not be required to make any payment or transfer any property to,
or for the benefit of, the Participants (under this Plan or otherwise) that
would be nondeductible by the Company by reason of section 280G of the Code or
that would subject the Participants to the excise tax described in section 4999
of the Code. All calculations required by this section shall be performed by
the Company's independent auditors selected by the Board of Directors prior to a
Change of Control ("Auditors"), based on information supplied by the Company and
the Participants and shall be binding on the Company and the Participants. All
fees and expenses of the Auditors to determine such amounts shall be paid by the
Company.
(b) REDUCTIONS. If the amount of the aggregate payments or property
transfers to the Participant must be reduced under this section, then the
Participant shall direct in which order the payments or transfers are to be
reduced, but no change in the timing of any payment or transfer shall be made
without the Company's consent. As a result of uncertainty in the application of
sections 280G and 4999 of the Code at the time of an initial determination by
the Auditors hereunder, it is possible that a payment will have been made by the
Company that should not have been made (an "Overpayment") or that an additional
payment will not have been made by the Company that could have been made (an
"Underpayment"). In the event that the Auditors, based upon the assertion of a
deficiency by the Internal Revenue Service against the Company or the
Participants that the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Participant that he shall repay to the
Company, together with interest at the applicable federal rate specified in
section 7872(f)(2) of the Code; provided, however, that no amount shall be
payable by the Participant to the Company if and to the extent that such payment
would not reduce the amount that is nondeductible under section 280G of the Code
or is subject to an excise tax under section 4999 of the Code.
<PAGE>
In the event that the Auditors determine that an Underpayment has
occurred, such Underpayment shall promptly be paid or transferred by the Company
to, or for the benefit of, the Participant, together with interest at the
applicable federal rate specified in section 7872(f)(2) of the Code.
SECTION 18. CHOICE OF LAW AND CLAIMS PROCEDURE; MISCELLANEOUS.
(a) The validity, interpretation, construction and performance of the Plan
shall be governed by ERISA and, to the extent they are not preempted, by the
laws of the State of California (without regard to their choice-of-law
provision).
(b) In accordance with the regulations of the U.S. Secretary of Labor, the
Committee shall 1. provide adequate notice in writing to any Participant,
surviving spouse or Beneficiary whose claim for benefits under the Plan has been
denied, setting forth the specific reasons for such denial and written in a
manner calculated to be understood by such Participant, surviving spouse or
Beneficiary, and 2. afford a reasonable opportunity to any Participant,
surviving spouse or Beneficiary whose claim for benefits has been denied for a
full and fair review by the Committee of the decision denying the claim.
SECTION 19. MISCELLANEOUS
(a) The interest in the benefits hereunder of a spouse of a Participant
who has predeceased the Participant shall automatically pass to the Participant
and shall not be transferable by such spouse in any manner, including but not
limited to such spouse's will, nor shall such interest pass under the laws of
intestate succession.
(b) The Committee is authorized to make any payments directed by court
order in any action in which the Plan or the Committee has been named as party.
(c) The Company is aware that upon the occurrence of a Change of Control,
the Board (which might then be composed of new members) or a stockholder of the
Company, or of any successor corporation might then cause or attempt to cause
the Company or such successor to refuse to comply with its obligations under the
Plan and might cause or attempt to cause the Company to institute, or may
institute, litigation seeking to deny Participants the benefits intended under
the Plan. In these circumstances, the purpose of the Plan could be frustrated.
Accordingly, if, following a Change of Control, it should appear to any
Participant that the Company has failed to comply with any of its obligations
under the Plan or any agreement thereunder or, if the Company or any other
person takes any action to declare the Plan void or unenforceable or institutes
any litigation or other legal action designed to deny, diminish or to recover
from any Participant the benefits intended to be provided hereunder, then the
Company irrevocably authorizes such Participant to retain counsel of his or her
choice at the expense of the Company to represent such Participant in connection
with the initiation or defense of any litigation or other legal action, whether
by or against the Company or any director, officer, stockholder or other person
affiliated with the Company or any successor thereto in any jurisdiction.
SECTION 20. EXECUTION.
To record the adoption of the Amended and Restated Plan by the Committee,
effective as of the date set forth above, the Company has caused its duly
authorized officer to affix the corporate name hereto.
<PAGE>
FOUNDATION HEALTH CORPORATION
By :
-----------------------------------------------
Daniel D. Crowley
Chairman, President and Chief Executive Officer
<PAGE>
APPENDIX A
PLAN PARTICIPANTS
Kirk A. Benson - July 1, 1994
Daniel D. Crowley - July 1, 1994
Jeffrey L. Elder - July 1, 1994
Allen J. Marabito - July 1, 1994
Danny O. Smithson - July 1, 1994
Cynthia Suzuki - July 1, 1994
Steven D. Tough - July 1, 1994
Edward J. Munno - November 1, 1994
Henry R. Loubet - January 9, 1995
<PAGE>
FOUNDATION HEALTH CORPORATION
EXECUTIVE RETIREE MEDICAL PLAN
(As amended and restated effective April 25, 1995)
SECTION 1. INTRODUCTION.
Foundation Health Corporation (the "Company") established the Foundation
Health Corporation Executive Retiree Medical Plan (the "Plan") for the purpose
of providing certain individuals with medical benefit coverage following
termination of their employment with the Company effective July 1, 1994. The
Plan was amended and restated effective April 25, 1995.
The Plan is intended to be an unfunded or insured plan maintained
primarily for the purpose of providing welfare benefits for a select group of
management or highly compensated employees, as described in Department of Labor
regulations section 2520.104-24.
SECTION 2. DEFINITIONS.
2.1. "COMMITTEE" means the Compensation and Organizational Committee of the
Board of Directors of the Company, as constituted from time to time.
2.2. "COMPANY" means Foundation Health Corporation, a Delaware corporation.
2.3 "DEPENDENT" means for a participant: (i) his or her legal spouse; (ii)
any unmarried child under the age of 19 years (or unmarried child under the age
of 24 years if full-time student) and any other unmarried child a participant
claims as a dependent for Internal Revenue Service purposes; or (iii) any child
who is incapable of self-support because of mental or physical disability.
2.4. "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
2.5. "PLAN" means this Foundation Health Corporation Executive Retiree
Medical Plan, as amended from time.
SECTION 3. ELIGIBILITY AND PARTICIPATION.
Each person listed in Appendix A shall become a participant in this Plan on
the date his or her Retirement Benefit commences under the Foundation Health
Corporation Supplemental Executive Retirement Plan provided the participant has
attained the age of 55. An individual who becomes a participant in the Plan
shall remain a participant until his or her death or voluntary election not to
participate.
<PAGE>
SECTION 4. PLAN BENEFITS.
A participant and his or her Dependents shall be entitled to coverage under
the group medical plan available to the Company's active executives on the same
terms and conditions as such coverage is available to active executives and
their Dependents. If a participant resides outside the service area of the
Company's group medical plan, the participant and his or her Dependents shall
receive medical benefit coverage under a medical plan or health insurance policy
that provides benefits that are reasonably comparable to the benefits under the
Company's group medical plan; provided that if no such coverage is reasonably
available (whether due to geography or the physical condition of the participant
or his or her Dependents), then the Company shall reimburse the participant for
any expenses that would have been covered under the Company's group medical
plan.
SECTION 5. AMENDMENT AND TERMINATION.
The Plan may be amended or terminated by the Company, but only with the
vote of 80% of all participants entitled to benefits hereunder; provided that no
amendment, suspension or termination shall reduce a participant's benefits under
the Plan that were earned as of the date immediately prior to such amendment,
suspension or termination.
SECTION 6. MISCELLANEOUS PROVISIONS.
6.1. PLAN ADMINISTRATION. The Plan shall be administered by the Committee.
The Committee shall have full power, authority and discretion to administer and
interpret the Plan, to establish procedures for administering the Plan, to
prescribe forms and to take any and all necessary actions in connection with the
Plan. The Committee's interpretation and construction of the Plan shall be
conclusive and binding on all persons.
6.2. NO EMPLOYMENT CONTRACT. Nothing in this Plan shall be construed to
limit in any way the right of the Company or its subsidiaries to terminate an
employee's employment at any time for any reason whatsoever.
6.3. NON-ALIENATION OF BENEFITS. No benefit payable under this Plan may be
assigned, pledged, mortgaged, or hypothecated, or shall be subject to legal
process or attachment for the payment of claims of any creditor of a Participant
or his or her Dependents.
6.4. PARTICIPANT'S RIGHTS UNSECURED. The interest under the Plan of any
participant or Dependent shall be an unsecured claim against the general assets
of the Company. No Participant or Dependent shall have an interest in or claim
against any specific asset of the Company pursuant to the Plan.
6.5. CHOICE OF LAW. The validity, interpretation, construction and
performance of the Plan shall be governed by ERISA and, to the extent they are
not preempted, by the laws of the State of California (without regard to their
choice-of-law provisions).
6.6. CLAIMS PROCEDURE. In accordance with the regulations of the U.S.
Secretary of Labor, the Committee shall (1) provide adequate notice in writing
to any participant or Dependent whose claim for benefits under the Plan has been
denied, setting forth the specific reasons for such denial and written in a
manner calculated to be understood by such participant or Dependent, and (2)
afford a reasonable opportunity to any participant or Dependent whose claim for
benefits has been denied for a full and fair review by the Committee of the
decision denying the claim.
<PAGE>
SECTION 7. EXECUTION.
To record the adoption of the amended and restated Plan by the Committee,
effective as of the date set forth above, the Company has caused its duly
authorized officer to affix the corporate name hereto.
FOUNDATION HEALTH CORPORATION
By _____________________________
Daniel D. Crowley
Chairman, CEO and President
<PAGE>
APPENDIX A
PLAN PARTICIPANTS
Kirk A. Benson
Daniel D. Crowley
Jeffrey L. Elder
Henry R. Loubet
Allen J. Marabito
Edward J. Munno
Danny O. Smithson
Cynthia Suzuki
Steven D. Tough
<PAGE>
1990 STOCK OPTION PLAN OF
FOUNDATION HEALTH CORPORATION
(AS AMENDED AND RESTATED EFFECTIVE APRIL 20, 1994)
SECTION I. ESTABLISHMENT AND PURPOSE.
The Plan was established in 1990, and it was most recently amended
and restated effective April 20, 1994. The Plan offers selected
employees, consultants and advisors and the non-employee directors of the
Company an opportunity to acquire a proprietary interest in the success of
the Company, or to increase such interest, by exercising Options to
purchase Shares of the Company's Common Stock. Options granted under the
Plan may include Nonstatutory Options as well as ISOs intended to qualify
under section 422 of the Code. The Plan also offers the non-employee
directors of the Company an opportunity to receive their directors' fees
in the form of Shares of the Company's Common Stock.
SECTION II. DEFINITIONS
A. "BOARD OF DIRECTORS" shall mean the Board of Directors of the
Company, as constituted from time to time.
A. "CHANGE IN CONTROL" means the occurrence of either of the
following events:
1. A change in the composition of the Board of Directors, as
a result of which fewer than one half of the incumbent directors are
directors who either:
a. Had been directors of the Company 24 months prior to
such change; or
a. Were elected, or nominated for election, to the
Board of Directors with the affirmative votes of at least a
majority of the directors who had been directors of the
Company 24 months prior to such change and who were still in
office at the time of the election or nomination; or
1. Any "person" (as such term is used in sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) by the
acquisition or aggregation of securities is or becomes the beneficial
owner, directly or indirectly, of securities of the Company representing
20% or more of the combined voting power of the Company's then outstanding
securities ordinarily (and apart from rights accruing under special
circumstances) having the right to vote at elections of directors (the
"Base Capital Stock"); except that any change in the relative beneficial
ownership of the Company's securities by any person resulting solely from
a reduction in the aggregate number of outstanding shares of Base Capital
Stock, and any decrease thereafter in such person's ownership of
securities, shall be disregarded until such person increases in any
manner, directly or indirectly, such person's beneficial ownership of
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any securities of the Company. For purposes of this Subsection (B)(2), the
term "person" shall not include an employee benefit plan maintained by the
Company.
A. "CODE" shall mean the Internal Revenue Code of 1986, as
amended.
A. "COMMITTEE" shall be the Compensation and Organization
Committee of the Board of Directors of the Company, as described in Section
III(A).
A. "COMPANY" shall mean Foundation Health Corporation, a Delaware
corporation.
A. "DIRECTOR" shall mean any individual who is not a common-law
employee of the Company or of a Subsidiary and who is duly elected and
serving the Company as a member of the Board of Directors.
A. "EMPLOYEE" shall mean
1. An individual who is a common-law employee of the Company
or of a Subsidiary; and
1. An independent contractor who performs services for the
Company or a Subsidiary as an advisor or consultant and who is not a
Director. Service as an independent contractor shall be considered
employment for all purposes of the Plan, except as provided in Section
IV(A).
A. "EXERCISE PRICE" shall mean the amount for which one Share may
be purchased upon exercise of an Option, as specified in the applicable
Stock Option Agreement.
A. "FAIR MARKET VALUE" shall mean the market price of Stock,
determined by the Committee as follows:
1. If the Stock was traded over-the-counter on the date in
question but was not classified as a national market issue, then the Fair
Market Value shall be equal to the mean between the last reported
representative bid and asked prices quoted by the NASDAQ system for such
date;
1. If the Stock was traded over-the-counter on the date in
question and was classified as a national market issue, then the Fair
Market Value shall be equal to the last transaction price quoted by the
NASDAQ system for such date;
1. If the Stock was traded on a stock exchange on the date
in question, then the Fair Market Value shall be equal to the closing
price reported by the applicable composite-transactions report for such
date; and
1. If none of the foregoing provisions is applicable, then
the Fair Market
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Value shall be determined by the Committee in good faith on such basis as
it deems appropriate.
In all cases, the determination of Fair Market Value by
the Committee shall be conclusive and binding on all persons.
A. "ISO" shall mean an employee incentive stock option described
in section 422 of the Code.
A. "NONSTATUTORY OPTION" shall mean a stock option not described
in section 422 or 423(b) of the Code.
A. "OPTION" shall mean an ISO or Nonstatutory Option granted
under the Plan and entitling the holder to purchase Shares.
A. "OPTIONEE" shall mean an individual who holds an Option.
A. "PLAN" shall mean this 1990 Stock Option Plan of Foundation
Health Corporation, as amended from time to time.
A. "SERVICE" shall mean service as an Employee or Director
including a Director of any Subsidiary of the Company.
A. "SHARE" shall mean one share of Stock, as adjusted in
accordance with Section IX (if applicable).
A. "STOCK" shall mean the Common Stock of the Company.
A. "STOCK OPTION AGREEMENT" shall mean the agreement between the
Company and an Optionee which contains the terms, conditions and
restrictions pertaining to his or her Option.
A. "SUBSIDIARY" shall mean any corporation, if the Company and/or
one or more other Subsidiaries own not less than 50 percent of the total
combined voting power of all classes of outstanding stock of such
corporation. A corporation that attains the status of a Subsidiary on a
date after the adoption of the Plan shall be considered a Subsidiary
commencing as of such date.
A. "TOTAL AND PERMANENT DISABILITY" shall mean that the Optionee
is unable to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment which can be expected
to result in death or which has lasted, or can be expected to last, for a
continuous period of not less than 12 months.
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SECTION III. ADMINISTRATION.
A. COMMITTEE MEMBERSHIP. The Plan shall be administered by the
Committee, which shall consist of three or more members of the Board of
Directors. The members of the Committee shall be appointed by the Board
of Directors. If no Committee has been appointed, the entire Board of
Directors shall constitute the Committee.
A. DISINTERESTED DIRECTORS. Subsection (A) above
notwithstanding, if the Company is subject to section 16 of the Securities
Exchange Act of 1934, as amended, the Committee shall consist only of
disinterested directors. A member of the Board of Directors shall be
deemed to be "disinterested" only if he or she satisfies such requirements
as the Securities and Exchange Commission may establish for disinterested
administrators acting under plans intended to qualify for exemption under
Rule 16b-3 (or its successor) under such Act.
A. COMMITTEE PROCEDURES. The Board of Directors shall designate
one of the members of the Committee as chairperson. The Committee may
hold meetings at such times and places as it shall determine. The acts of
a majority of the Committee members present at meetings at which a quorum
exists, or acts reduced to or approved in writing by all Committee
members, shall be valid acts of the Committee.
A. COMMITTEE RESPONSIBILITIES. Subject to the provisions of the
Plan, the Committee shall have full authority and discretion to take the
following actions:
1. To interpret the Plan and to apply its provisions;
1. To adopt, amend or rescind rules, procedures and forms
relating to the Plan;
1. To authorize any person to execute, on behalf of the
Company, any instrument required to carry out the purposes of the Plan;
1. Except with respect to Optionees who are Directors, to
determine when Options are to be granted under the Plan;
1. Except with respect to Optionees who are Directors, to
select the Optionees;
1. Except with respect to Optionees who are Directors, to
determine the number of Shares to be made subject to each Option;
1. Except with respect to Optionees who are Directors, to
prescribe the terms and conditions of each Option, to determine whether
such Option is to be classified as an ISO or as a Nonstatutory Option, and
to specify the provisions of the Stock Option Agreement relating to such
Option;
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1. To amend any outstanding Stock Option Agreement, subject
to applicable legal restrictions and to the consent of the Optionee who
entered into such agreement;
1. To prescribe the consideration for the grant of each
Option under the Plan and to determine the sufficiency of such
consideration; and
1. To take any other actions deemed necessary or advisable
for the administration of the Plan.
All decisions, interpretations and other actions of the Committee shall be
final and binding on all Optionees and all persons deriving their rights
from an Optionee. No member of the Committee shall be liable for any
action that he or she has taken or has failed to take in good faith with
respect to the Plan or any Option.
SECTION IV. ELIGIBILITY.
A. EMPLOYEES. Only Employees (including, without limitation,
independent contractors who are not Directors) shall be eligible for
designation as Optionees by the Committee. In addition, only Employees
who are common-law employees of the Company or of a Subsidiary shall be
eligible for the grant of ISOs.
1. TEN-PERCENT STOCKHOLDERS. An Employee who owns more than
10 percent of the total combined voting power of all classes of
outstanding stock of the Company or any of its Subsidiaries shall not be
eligible for designation as an Optionee for an ISO unless (i) the Exercise
Price is at least 110 percent of the Fair Market Value of a Share on the
date of grant and (ii) the ISO by its terms is not exercisable after the
expiration of five years from the date of grant.
1. ATTRIBUTION RULES. For purposes of Subsection (A)(1)
above, in determining stock ownership, an Employee shall be deemed to own
the stock owned, directly or indirectly, by or for his or her brothers,
sisters, spouse, ancestors and lineal descendants. Stock owned, directly
or indirectly, by or for a corporation, partnership, estate or trust shall
be deemed to be owned proportionately by or for its stockholders, partners
or beneficiaries. Stock with respect to which such Employee holds an
option shall not be counted.
1. OUTSTANDING STOCK. For purposes of Subsection (A)(1)
above, "outstanding stock" shall include all stock actually issued and
outstanding immediately after the grant. "Outstanding stock" shall not
include treasury shares or shares authorized for issuance under
outstanding options held by the Employee or by any other person.
A. DIRECTORS. Directors of the Company shall be eligible for
participation in the Plan as set forth in Sections VI(B) and VIII.
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SECTION V. STOCK SUBJECT TO PLAN.
A. BASIC LIMITATION. Shares offered under the Plan shall be
authorized but unissued Shares or treasury Shares. The aggregate number
of Shares which may be issued under the Plan upon exercise of Options
shall not exceed 5,525,000 Shares, subject to adjustment pursuant to
Section IX. Commencing with July 1, 1994, the Committee shall not grant
options to any one individual covering a number of shares in excess of
1,000,000 (the "Allocation limit"), subject to adjustment pursuant to
Section IX. The number of Shares which are subject to Options outstanding
at any time under the Plan shall not exceed the number of Shares which
then remain available for issuance under the Plan. The Company, during
the term of the Plan, shall at all times reserve and keep available
sufficient Shares to satisfy the requirements of the Plan.
A. ADDITIONAL SHARES. In the event that any outstanding
Option for any reason expires or is canceled or otherwise terminated, the
Shares allocable to the unexercised portion of such Option shall again be
available for the purposes of the Plan.
A. ADJUSTMENT OF ALLOCATION LIMIT. If, as a result of
subsequent regulations or other interpretive guidance, the Committee
determines that (i) the inclusion of the Allocation Limit is not required
in order for option grants to qualify as performance-based compensation
under the provisions of Section 162(m) of the Code, or (ii) option grants
can qualify as performance-based compensation even if the Allocation Limit
was made less restrictive, the Committee will be entitled to amend the
Plan accordingly (including amendments to adjust or eliminate altogether
the Allocation Limit).
SECTION VI. TERMS AND CONDITIONS OF OPTIONS.
A. EMPLOYEES.
1. STOCK OPTION AGREEMENT. Each grant of an Option under
the Plan shall be evidenced by a Stock Option Agreement between the
Optionee and the Company. Such Option shall be subject to all applicable
terms and conditions of the Plan and may be subject to any other terms and
conditions which are not inconsistent with the Plan and which the
Committee deems appropriate for inclusion in a Stock Option Agreement.
The provisions of the various Stock Option Agreements entered into under
the Plan need not be identical.
1. NUMBER OF SHARES. Each Stock Option Agreement shall
specify the number of shares that are subject to the Option and shall
provide for the adjustment of such number in accordance with Section IX.
The Stock Option Agreement shall also specify whether the Option is an ISO
or a Nonstatutory Option.
1. EXERCISE PRICE. Each Stock Option Agreement shall
specify the Exercise Price. The Exercise Price shall not be less than 100
percent of the Fair Market Value of a Share on the date of grant, except
as otherwise provided in Section IV (A)(1).
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Subject to the preceding sentence, the Exercise Price under any Option
shall be determined by the Committee at its sole discretion. The Exercise
Price shall be payable in a form described in Section VII.
1. EXERCISABILITY AND TERM. Each Stock Option Agreement
shall specify the date when all or any installment of the Option is to
become exercisable. The vesting of any Option shall be determined by the
Committee at its sole discretion. A Stock Option Agreement may provide
for accelerated exercisability in the event of the Optionee's death, Total
and Permanent Disability or retirement or other events. The Stock Option
Agreement shall also specify the term of the Option. The term shall not
exceed 10 years from the date of grant, except as otherwise provided in
Section IV(A)(1). Subject to the preceding sentence, the Committee at its
sole discretion shall determine when an Option is to expire.
1. EFFECT OF CHANGE IN CONTROL. The Committee may
determine, at the time of granting an Option or thereafter, that such
Option shall become fully exercisable as to all Shares subject to such
Option in the event that a Change in Control occurs with respect to the
Company. If the Committee finds that there is a reasonable possibility
that, within the succeeding six months, a Change in Control will occur
with respect to the Company, then the Committee may determine that any or
all outstanding Options shall become fully exercisable as to all Shares
subject to such Options.
A. DIRECTORS.
1. STOCK OPTION AGREEMENTS. A Nonstatutory Option to
purchase Shares shall be granted to each Director then in office on April
22, 1993. In the case of a Director who is not a Director on April 22,
1993, the grant of an option to such Director under this Subsection (B)(1)
shall occur on the date such Director takes office. Each grant of an
Option under the Plan shall be evidenced by a Stock Option Agreement
between the Optionee and the Company. Such Option shall be subject to all
applicable terms and conditions of the Plan and to stockholder approval of
this provision. The provisions of the various Stock Option Agreements
entered into under the Plan need not be identical.
1. NUMBER OF SHARES. Each Stock Option Agreement shall
specify the number of Shares that are subject to the Option and shall
provide for the adjustment of such number in accordance with Section IX.
The number of Shares that are subject to each Option under Subsection
(B)(1) shall be 25,000.
1. EXERCISE PRICE. Each Stock Option Agreement shall
specify the Exercise Price. The Exercise Price shall be 100 percent of
the Fair Market Value of a Share on the date of grant. The Exercise Price
shall be payable in cash or Common Stock.
1. EXERCISABILITY AND TERM. Each Stock Option Agreement
shall specify that the Option is to become exercisable in accordance with
the following schedule:
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Anniversary of Percentage of
Date of Grant Shares Exercisable
------------- ------------------
First 20%
Second 40%
Third 60%
Fourth 80%
Fifth 100%
The Stock Option Agreement shall specify the term of the Option which
shall be 10 years from the date of grant, unless earlier terminated as set
forth herein.
1. AMENDMENTS. The foregoing provisions of this Subsection
(B) shall not be amended more than once every six months, unless required
by the Code or the regulations thereunder.
A. WITHHOLDING TAXES. As a condition to the exercise of an
Option, the Optionee shall make such arrangements as the Committee may
require for the satisfaction of any federal, state, local or foreign
withholding tax obligations that may arise in connection with such
exercise. The Optionee shall also make such arrangements as the Committee
may require for the satisfaction of any federal, state, local or foreign
withholding tax obligations that may arise in connection with the
disposition of Shares acquired by exercising an Option. The Committee may
permit the Optionee to satisfy all or part of his or her withholding or
income tax obligations by having the Company withhold a portion of any
Shares that otherwise would be issued to him or her or by surrendering a
portion of any Shares that previously were issued to him or her. Such
Shares shall be valued at their Fair Market Value on the date when taxes
otherwise would be withheld in cash. Any payment of taxes by assigning
Shares to the Company may be subject to restrictions, including any
restrictions required by rules of the Securities and Exchange Commission.
A. NONTRANSFERABILITY. No Option shall be transferable by the
Optionee other than by will, by a beneficiary designation executed by the
Optionee and delivered to the Company or by the laws of descent and
distribution. An Option may be exercised during the lifetime of the
Optionee only by him or her or by his or her guardian or legal
representative. No Option or interest therein may be transferred,
assigned, pledged or hypothecated by the Optionee during his or her
lifetime, whether by operation of law or otherwise, or be made subject to
execution, attachment or similar process.
A. TERMINATION OF SERVICE (EXCEPT BY DEATH). If an Optionee's
Service terminates for any reason other than his or her death, then his or
her Option(s) shall expire on the earliest of the following occasions:
1. The expiration date determined pursuant to Subsection
(A)(4) or (B)(4) above;
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1. The date 90 days after the termination of his or her
Service for any reason other than Total and Permanent Disability; or
1. The date 12 months after the termination of his or her
Service by reason of Total and Permanent Disability.
The Optionee may exercise all or part of his or her Option(s) at any time
before the expiration of such Option(s) under the preceding sentence, but
only to the extent that such Option(s) had become exercisable before his
or her Service terminated or became exercisable as a result of the
termination. The balance of such Option(s) shall lapse when the
Optionee's Service terminates unless otherwise specified in the applicable
Stock Option Agreement. In the event that the Optionee dies after the
termination of his or her Service but before the expiration of his or her
Option(s), all or part of such Option(s) may be exercised (prior to
expiration) by the executors or administrators of the Optionee's estate or
by any person who has acquired such Option(s) directly from him or her by
bequest, beneficiary designation or inheritance, but only to the extent
that such Option(s) had become exercisable before his or her Service
terminated or became exercisable as a result of the termination.
A. LEAVES OF ABSENCE. For purposes of Subsection E above,
Service shall be deemed to continue while the Optionee is on military
leave, sick leave or other bona fide leave of absence (as determined by
the Committee). The foregoing notwithstanding, in the case of an ISO
granted to an Employee under the Plan, Service shall not be deemed to
continue beyond the first 90 days of such leave, unless the Optionee's
reemployment rights are guaranteed by statute or by contract.
A. DEATH OF OPTIONEE. If an Optionee dies while he or she is in
Service, then his or her Option(s) shall expire on the earlier of the
following dates:
1. The expiration date determined pursuant to Subsection
(A)(4) or (B)(4) above; or
1. The date 12 months after his or her death.
All or part of the Optionee's Option(s) may be exercised
at any time before the expiration of such Option(s) under the preceding
sentence by the executors or administrators of his or her estate or by any
person who has acquired such Option(s) directly from him or her by
bequest, beneficiary designation or inheritance, but only to the extent
that such Option(s) had become exercisable before his or her death or
became exercisable as a result of his or her death. The balance of such
Option(s) shall lapse when the Optionee dies.
A. NO RIGHTS AS A STOCKHOLDER. An Optionee, or a transferee of
an Optionee, shall have no rights as a stockholder with respect to any
Shares covered by his or her Option until the date of the issuance of a
stock certificate for such Shares. No adjustments shall be made, except
as provided in Section IX.
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A. MODIFICATION, EXTENSION AND ASSUMPTION OF OPTIONS. Within the
limitations of the Plan, the Committee may modify, extend or assume
outstanding Options or may accept the cancellation of outstanding Options
(whether granted by the Company or another issuer) in return for the grant
of new Options for the same or a different number of Shares and at the
same or a different price. The foregoing notwithstanding, no modification
of an Option shall, without the consent of the Optionee, impair his or her
rights or increase his or her obligations under such Option.
A. RESTRICTIONS ON TRANSFER OF SHARES. Any Shares issued upon
exercise of an Option shall be subject to such special forfeiture
conditions, rights of repurchase, rights of first refusal and other
transfer restrictions as the Committee may determine. Such restrictions
shall be set forth in the applicable Stock Option Agreement and shall
apply in addition to any general restrictions that may apply to all
holders of Shares.
SECTION VII. PAYMENT FOR SHARES.
A. GENERAL RULE. The entire Exercise Price of Shares issued
under the Plan shall be payable in lawful money of the United States of
America at the time when such Shares are purchased, except as follows:
1. In the case of an ISO granted under the Plan to an
Employee, payment shall be made only pursuant to the express provisions of
the applicable Stock Option Agreement. However, the Committee (at its
sole discretion) may specify in the Stock Option Agreement that payment
may be made in one or more of the forms described in Subsections (B), (C),
(D) and (E) below.
1. In the case of a Nonstatutory Option granted under the
Plan to an Employee, the Committee (at its sole discretion) may accept
payment in one or more of the forms described in Subsections (B), (C), (D)
and (E) below.
1. In the case of a Nonstatutory Option granted under the
Plan to a Director, payment may be made in one or both of the forms
described in Subsections (B) and (D) below.
A. SURRENDER OF STOCK. To the extent that this Subsection (B) is
applicable and to the extent that applicable law permits, payment may be
made all or in part with Shares which have already been owned by the
Optionee or his or her representative for more than six months and which
are surrendered to the Company in good form for transfer. Such Shares
shall be valued at their Fair Market Value on the date when the new Shares
are purchased under the Plan.
A. PROMISSORY NOTE. To the extent that this Subsection (C) is
applicable, a portion of the Exercise Price of Shares issued under the
Plan may be payable by a full-recourse
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promissory note; provided that (i) the par value of such Shares must be
paid in lawful money of the United States of America at the time when such
Shares are purchased, (ii) the Shares are security for payment of the
principal amount of the promissory note and interest thereon and (iii) the
interest rate payable under the terms of the promissory note shall not be
less than the minimum rate (if any) required to avoid the imputation of
additional interest under the Code. Subject to the foregoing, the
Committee (at its sole discretion) shall specify the term, interest rate,
amortization requirements (if any) and other provisions of such note.
A. EXERCISE/SALE. To the extent that this Subsection (D) is
applicable, payment may be made by the delivery (on a form prescribed by
the Company) of an irrevocable direction to a securities broker approved
by the Company to sell Shares and to deliver all or part of the sales
proceeds to the Company in payment of all or part of the Exercise Price
and any withholding taxes.
A. EXERCISE/PLEDGE. To the extent that this Subsection (E) is
applicable, payment may be made by the delivery (on a form prescribed by
the Company) of an irrevocable direction to pledge Shares to a securities
broker or lender approved by the Company, as security for a loan, and to
deliver all or part of the loan proceeds to the Company in payment of all
or part of the Exercise Price and any withholding taxes.
SECTION VIII. PAYMENT OF DIRECTOR'S FEES IN STOCK.
A. ELECTION. A Director may elect to receive his or her
director's fees from the Company in the form of Shares to be issued under
the Plan. Such an election may be made with respect to:
1. All director's fees, including (without limitation)
annual retainer fees, meeting fees and fees paid to committee
chairpersons, but not including expense reimbursements and consulting
fees; or
1. Annual retainer payments only.
An election under this Section VIII shall be filed with the Company
on the prescribed form. The election shall apply only to fees payable at
least six months after such form has been received by the Company. The
election may be amended or canceled by filing a new form with the Company,
but the new form shall apply only to fees payable at least six months
after it has been received by the Company. The number of Shares to be
issued shall be determined by dividing the amount of the fee by the Fair
Market Value of one Share on the date when such fee otherwise would be
paid in cash.
A. WITHHOLDING TAXES. The Director shall satisfy all of his or
her federal, state or local withholding tax obligations (if any) by having
the Company withhold a portion of the Shares that otherwise would be
issued to him or her. Such Shares shall be valued at their Fair Market
Value on the date when taxes otherwise would be withheld in cash. The
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<PAGE>
payment of taxes by assigning Shares to the Company shall be subject to
any restrictions required by rules of the Securities and Exchange
Commission.
SECTION IX. ADJUSTMENT OF SHARES.
A. GENERAL. In the event of a subdivision of the outstanding
Stock, a declaration of a dividend payable in Shares, a declaration of a
dividend payable in a form other than Shares in an amount that has a
material effect on the value of Shares, a combination or consolidation of
the outstanding Stock (by reclassification or otherwise) into a lesser
number of Shares, a recapitalization or a similar occurrence, the
Committee shall make appropriate adjustments in one or more of (i) the
number of Shares available for future grants under Section V, (ii) the
number of Shares covered by each outstanding Option or (iii) the Exercise
Price under each outstanding Option.
A. MERGER; CONSOLIDATION. In the event that the Company is a
party to a merger or consolidation, outstanding Options shall be subject
to the agreement of merger or consolidation. Such agreement shall provide
(i) for the assumption of outstanding Options by the surviving corporation
or its parent, (ii) for their continuation by the Company, if the Company
is a surviving corporation, (iii) for payment of a cash settlement equal
to the difference between the amount to be paid for one Share under such
agreement and the Exercise Price or (iv) for the acceleration of their
exercisability followed by the cancellation of Options not exercised, in
all cases other than clause (iii) without the Optionees' consent. (The
Optionees' consent shall be required for a cash settlement.) Any
cancellation shall not occur earlier than 30 days after such acceleration
is effective and Optionees have been notified of such acceleration. In the
case of Options that have been outstanding for less than 12 months, a
cancellation need not be preceded by an acceleration.
A. RESERVATION OF RIGHTS. Except as provided in this Section IX,
an Optionee shall have no rights by reason of (i) any subdivision or
consolidation of shares of stock of any class, (ii) the payment of any
dividend or (iii) any other increase or decrease in the number of shares
of stock of any class. Any issue by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
not affect, and no adjustment by reason thereof shall be made with respect
to, the number or Exercise Price of Shares subject to an Option. The
grant of an Option pursuant to the Plan shall not affect in any way the
right or power of the Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure, to merge
or consolidate or to dissolve, liquidate, sell or transfer all or any part
of its business or assets.
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SECTION X. SECURITIES LAWS.
Shares shall not be issued under the Plan unless the issuance and
delivery of such Shares complies with (or is exempt from) all applicable
requirements of law, including (without limitation) the Securities Act of
1933, as amended, the rules and regulations promulgated thereunder, state
securities laws and regulations, and the regulations of any stock exchange
on which the Company's securities may then be listed.
SECTION XI. NO RIGHTS TO SERVICE.
No provision of the Plan, nor any Option granted under the Plan,
shall be construed to give any person any right to become, to be treated
as, or to remain an Employee or Director of the Company, as the case may
be. The Company and its Subsidiaries reserve the right to terminate any
person's Service at any time and for any reason.
SECTION XII. DURATION AND AMENDMENTS.
A. TERM OF THE PLAN. The Plan, as amended and restated, is
effective as of April 20, 1994, subject to stockholder approval. The Plan
shall terminate automatically on March 31, 2000 and may be terminated on
any earlier date pursuant to Subsection (B) below.
A. RIGHT TO AMEND OR TERMINATE THE PLAN. The Committee may
amend, suspend or terminate the Plan at any time and for any reason;
provided, however, that any amendment of the Plan which increases the
number of Shares available for issuance under the Plan (except as provided
in Section IX), or which materially changes the class of persons who are
eligible for the grant of ISOs, shall be subject to the approval of the
Company's stockholders. Stockholder approval shall not be required for
any other amendment of the Plan, except to the extent required by
applicable law.
A. EFFECT OF AMENDMENT OR TERMINATION. No Shares shall be issued
under the Plan after the termination thereof, except upon exercise of an
Option granted prior to such termination. The termination of the Plan, or
any amendment thereof, shall not affect any Share previously issued or any
Option previously granted under the Plan.
SECTION XIII. EXECUTION.
To record the amendment and restatement of the Plan by the Board of
Directors on April 20, 1994, the Company has caused its authorized officer
to execute the same.
FOUNDATION HEALTH CORPORATION
By: /s/Daniel D. Crowley
---------------------
President and Chief Executive Officer
<PAGE>
FOUNDATION HEALTH CORPORATION
PROFIT SHARING AND
401(K) PLAN
(Amended and Restated Effective January 1, 1994)
Plan Number: 001
EIN: 68-0014772
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE 1 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE 2 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1 Accounts . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 Account Balance . . . . . . . . . . . . . . . . . . . . . 2
2.3 Actual Deferral Percentage . . . . . . . . . . . . . . . . 2
2.4 Adjustment Factor . . . . . . . . . . . . . . . . . . . . . 2
2.5 Administrator . . . . . . . . . . . . . . . . . . . . . . . 2
2.6 Affiliated Group . . . . . . . . . . . . . . . . . . . . . 2
2.7 After-Tax Contributions . . . . . . . . . . . . . . . . . . 2
2.8 After-Tax Contribution Account . . . . . . . . . . . . . . 2
2.9 After-Tax Contribution Election . . . . . . . . . . . . . 3
2.10 Annuity Starting Date . . . . . . . . . . . . . . . . . . . 3
2.11 Average Actual Deferral Percentage . . . . . . . . . . . . 3
2.12 Average Contribution Percentage . . . . . . . . . . . . . . 3
2.13 Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . 3
2.14 Board of Directors . . . . . . . . . . . . . . . . . . . . 3
2.15 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.16 Company . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.17 Compensation . . . . . . . . . . . . . . . . . . . . . . . 3
2.18 Contribution Percentage . . . . . . . . . . . . . . . . . . 4
2.19 Deferral Election . . . . . . . . . . . . . . . . . . . . . 4
2.20 Deferred Salary Account . . . . . . . . . . . . . . . . . . 4
<PAGE>
2.21 Deferred Salary Contribution . . . . . . . . . . . . . . . 4
2.22 Disability Retirement Date . . . . . . . . . . . . . . . . 4
2.23 Disabled . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.24 Early Retirement Date . . . . . . . . . . . . . . . . . . . 4
2.25 Effective Date . . . . . . . . . . . . . . . . . . . . . . 5
2.26 Employee . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.27 Employer . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.28 Employer Account . . . . . . . . . . . . . . . . . . . . . 5
2.29 Employer Contributions . . . . . . . . . . . . . . . . . . 6
2.30 Employment Commencement Date . . . . . . . . . . . . . . . 6
2.31 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.32 Family Member . . . . . . . . . . . . . . . . . . . . . . . 6
2.33 FHC Stock . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.34 FHC Stock Fund . . . . . . . . . . . . . . . . . . . . . . 6
2.35 Highly Compensated Employee . . . . . . . . . . . . . . . . 6
2.36 Hour of Service . . . . . . . . . . . . . . . . . . . . . . 8
2.37 Investment Funds . . . . . . . . . . . . . . . . . . . . . 7
2.38 Leased Employee . . . . . . . . . . . . . . . . . . . . . . 8
2.39 Leave of Absence . . . . . . . . . . . . . . . . . . . . . 8
2.40 Married Participant . . . . . . . . . . . . . . . . . . . . 8
2.41 Matching Rate . . . . . . . . . . . . . . . . . . . . . . . 8
2.42 Nonhighly Compensated Employee . . . . . . . . . . . . . . 8
2.43 Normal Retirement Age . . . . . . . . . . . . . . . . . . . 8
2.44 Normal Retirement Date . . . . . . . . . . . . . . . . . . 9
2.45 One-Year Period of Severance . . . . . . . . . . . . . . . 9
2.46 Participant . . . . . . . . . . . . . . . . . . . . . . . . 9
2.47 Participation Commencement Date . . . . . . . . . . . . . . 9
2.48 Period of Service . . . . . . . . . . . . . . . . . . . . . 9
2.49 Period of Severance . . . . . . . . . . . . . . . . . . . . 9
<PAGE>
2.50 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.51 Plan Year . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.52 Postponed Retirement Date . . . . . . . . . . . . . . . . . 9
2.53 Prior Plan . . . . . . . . . . . . . . . . . . . . . . . . 9
2.54 Qualified Joint and Survivor Annuity . . . . . . . . . . . 10
2.55 Qualified Matching Contribution and Qualified Nonelective
Contribution . . . . . . . . . . . . . . . . . . . . . . 10
2.56 Reemployment Commencement Date . . . . . . . . . . . . . . 10
2.57 Retirement Date . . . . . . . . . . . . . . . . . . . . . . 10
2.58 Rollover Account . . . . . . . . . . . . . . . . . . . . . 10
2.59 Rollover Contribution . . . . . . . . . . . . . . . . . . . 10
2.60 Severance From Service Date . . . . . . . . . . . . . . . . 10
2.61 Spouse or Surviving Spouse . . . . . . . . . . . . . . . . 11
2.62 Top-Paid Group . . . . . . . . . . . . . . . . . . . . . . 11
2.63 Total Compensation . . . . . . . . . . . . . . . . . . . . 11
2.64 Total Compensation Plus Deferrals . . . . . . . . . . . . . 12
2.65 Trust Agreement . . . . . . . . . . . . . . . . . . . . . . 12
2.66 Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.67 Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . 12
2.68 Valuation Date . . . . . . . . . . . . . . . . . . . . . . 12
2.69 Year of Service . . . . . . . . . . . . . . . . . . . . . . 12
<PAGE>
ARTICLE 3 PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . 12
3.1 Plan Entry Date . . . . . . . . . . . . . . . . . . . . . . 12
3.2 Rehired Employee . . . . . . . . . . . . . . . . . . . . . 13
3.3 Loss of Participant Status . . . . . . . . . . . . . . . . 13
3.4 Suspension of Participation . . . . . . . . . . . . . . . . 13
ARTICLE 4 DEFERRED SALARY CONTRIBUTIONS AND AFTER-TAX CONTRIBUTIONS . 14
4.1 Deferred Salary Contributions . . . . . . . . . . . . . . . 14
4.2 Deferral Election . . . . . . . . . . . . . . . . . . . . . 15
4.3 Suspension of, or Change in, Deferral Election . . . . . . 15
4.4 Deferral Percentage Limitation . . . . . . . . . . . . . . 15
4.5 Special Rules on Deferral Percentage Limitation . . . . . . 16
4.6 Adjustment of Deferrals . . . . . . . . . . . . . . . . . . 17
4.7 After-Tax Contributions . . . . . . . . . . . . . . . . . . 17
4.8 After-Tax Contribution Election . . . . . . . . . . . . . . 17
4.9 . . Suspension of, or Change in, After-Tax Contributions18
ARTICLE 5 EMPLOYER CONTRIBUTIONS . . . . . . . . . . . . . . . . . . 18
5.1 Employer Discretionary Contributions . . . . . . . . . . . 18
5.2 Employer Matching Contributions (Effective Until 9/30/94) . 19
5.2 Employer Matching Contributions (Effective 10/1/94) . . . . 19
5.3 Percentage Limitation on Employer Matching Contributions and
After-Tax Contributions . . . . . . . . . . . . . . . . . . 20
5.4 Special Rules for Contribution Percentage Limit Testing . . 21
5.5 Overall Limitation on Annual Additions . . . . . . . . . . 21
5.6 Special Rules . . . . . . . . . . . . . . . . . . . . . . . 22
5.7 Definitions . . . . . . . . . . . . . . . . . . . . . . . . 24
5.8 Reversion of Employer Contributions . . . . . . . . . . . . 25
5.9 Timing of Employer Contributions . . . . . . . . . . . . . 25
<PAGE>
ARTICLE 6 PARTICIPANTS' ACCOUNTS . . . . . . . . . . . . . . . . . . 25
6.1 Separate Accounts . . . . . . . . . . . . . . . . . . . . . 25
6.2 Valuation of Funds . . . . . . . . . . . . . . . . . . . . 26
6.3 Investment of Contributions . . . . . . . . . . . . . . . . 26
6.4 Change of Investment Election . . . . . . . . . . . . . . . 27
6.5 Restrictions on Investment Elections of Certain Participants 27
6.6 Statements . . . . . . . . . . . . . . . . . . . . . . . . 27
ARTICLE 7 INVESTMENT OF FUNDS . . . . . . . . . . . . . . . . . . . . 27
7.1 Trust Agreement . . . . . . . . . . . . . . . . . . . . . . 27
7.2 Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . 28
7.3 Independent Qualified Public Accountant . . . . . . . . . . 28
ARTICLE 8 BENEFIT ELECTION AND BENEFICIARY DESIGNATION PROCEDURES . . 29
8.1 Elections as to Form of Distribution . . . . . . . . . . . 29
8.2 Information on Form of Distribution . . . . . . . . . . . . 30
8.3 Designation of Beneficiary for Death Benefit . . . . . . . 30
8.4 Information on Death Benefits . . . . . . . . . . . . . . . 32
ARTICLE 9 DISTRIBUTION OF BENEFITS . . . . . . . . . . . . . . . . . 32
9.1 Time of Distribution: General Rule . . . . . . . . . . . . 32
9.2 Earliest Time of Distribution . . . . . . . . . . . . . . . 33
9.3 Latest Time of Distribution . . . . . . . . . . . . . . . . 33
9.4 Normal Form of Benefit . . . . . . . . . . . . . . . . . . 33
9.5 Optional Forms of Benefit . . . . . . . . . . . . . . . . . 34
9.6 Qualified Pre-Retirement Survivor Annuity . . . . . . . . . 34
9.7 Small Benefits: Immediate Lump Sum . . . . . . . . . . . . 35
9.8 Investment of Account Balance of Terminated Participant . . 35
9.9 Required Distributions . . . . . . . . . . . . . . . . . . 35
9.10 Direct Rollovers . . . . . . . . . . . . . . . . . . . . . 36
<PAGE>
ARTICLE 10 VESTING, RETIREMENT, AND TERMINATION OF EMPLOYMENT . . . . 37
10.1 Vesting in Deferred Salary, After-Tax and Rollover Contributions 37
10.2 Vesting in Employer Account . . . . . . . . . . . . . . . . 37
10.3 Vesting After Prior Distributions . . . . . . . . . . . . . 38
10.4 Forfeitures . . . . . . . . . . . . . . . . . . . . . . . . 38
ARTICLE 11 WITHDRAWALS . . . . . . . . . . . . . . . . . . . . . . . 39
11.1 Hardship Withdrawals . . . . . . . . . . . . . . . . . . . 39
11.2 Withdrawal of After-Tax Contributions . . . . . . . . . . . 41
11.3 Loans to Participants . . . . . . . . . . . . . . . . . . . 41
ARTICLE 12 DISTRIBUTION OF EXCESS DEFERRALS, EXCESS CONTRIBUTIONS AND EXCESS
AGGREGATE
CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . 44
12.1 Distribution of Excess Deferrals . . . . . . . . . . . . . 44
12.2 Distribution of Excess Aggregate Contributions . . . . . . 46
ARTICLE 13 ADMINISTRATION OF THE PLAN . . . . . . . . . . . . . . . . 48
13.1 Plan Administrator . . . . . . . . . . . . . . . . . . . . 48
13.2 Selection of Committee . . . . . . . . . . . . . . . . . . 48
13.3 Powers of the Administrator . . . . . . . . . . . . . . . . 49
13.4 Selection and Replacement of Trustee . . . . . . . . . . . 50
13.5 Selection of Other Professional Counselors . . . . . . . . 50
13.6 Reliance on Professional Counselors . . . . . . . . . . . . 51
13.7 Plan Claim Procedures . . . . . . . . . . . . . . . . . . . 51
13.8 Source of Payment of Expenses . . . . . . . . . . . . . . . 52
13.9 Compensation of the Administrator . . . . . . . . . . . . . 53
13.10 Fiduciary Liability Insurance . . . . . . . . . . . . . . 53
<PAGE>
ARTICLE 14 AMENDMENT OR TERMINATION . . . . . . . . . . . . . . . . . 53
14.1 Right to Amend . . . . . . . . . . . . . . . . . . . . . . 53
14.2 Right to Discontinue Plan . . . . . . . . . . . . . . . . . 54
14.3 Obligations Upon Merger, Consolidation or Transfer . . . . 54
14.4 Obligations Upon Termination, Partial Termination or
Discontinuance . . . . . . . . . . . . . . . . . . . . . . 54
14.5 Continued Funding After Plan Termination . . . . . . . . . 55
14.6 Distribution Upon Sale of Assets . . . . . . . . . . . . . 55
ARTICLE 15 GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . 55
15.1 No Implied Employment Contract . . . . . . . . . . . . . . 55
15.2 Benefits Not Assignable . . . . . . . . . . . . . . . . . . 56
15.3 Facility of Payment . . . . . . . . . . . . . . . . . . . . 56
15.4 Source of Benefits . . . . . . . . . . . . . . . . . . . . 56
15.5 Lost Participants or Beneficiaries . . . . . . . . . . . . 56
15.6 Service in Several Fiduciary Capacities . . . . . . . . . . 57
15.7 Construction of Plan . . . . . . . . . . . . . . . . . . . 57
15.8 Governing Law . . . . . . . . . . . . . . . . . . . . . . . 57
15.9 Intent to Comply With Legal Requirements . . . . . . . . . 57
15.10 Annuity Contracts . . . . . . . . . . . . . . . . . . . . 57
15.11 Voting Rights . . . . . . . . . . . . . . . . . . . . . . 58
15.12 Other Instructions by Participants . . . . . . . . . . . . 58
ARTICLE 16 ROLLOVER CONTRIBUTIONS AND TRANSFERS . . . . . . . . . . . 59
16.1 Transfers From Other Plans . . . . . . . . . . . . . . . . 59
16.2 Rollover of Funds From Conduit Individual Retirement Account
(IRA) . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
16.3 Mistaken Rollover . . . . . . . . . . . . . . . . . . . . . 60
ARTICLE 17 TOP-HEAVY PROVISIONS . . . . . . . . . . . . . . . . . . . 61
17.1 Top-Heavy Plan Defined . . . . . . . . . . . . . . . . . . 61
17.2 Other Definitions . . . . . . . . . . . . . . . . . . . . . 62
17.3 Top-Heavy Vesting . . . . . . . . . . . . . . . . . . . . . 63
17.4 Top-Heavy Contributions . . . . . . . . . . . . . . . . . . 64
17.5 Adjustment to Limitation on Annual Additions . . . . . . . 64
<PAGE>
FOUNDATION HEALTH CORPORATION
PROFIT SHARING AND
401(k) PLAN
(Amended and Restated Effective January 1, 1994)
ARTICLE 1
INTRODUCTION
The Plan was most recently amended and restated, generally effective January 1,
1994, to read as set forth herein. The Plan was originally adopted effective
April 1, 1989 as an amendment, restatement and continuation of the CPI Profit
Sharing Plan sponsored by International Central Bank and Trust Corporation. The
purpose of the Plan is to provide participating employees with retirement
benefits by affording them the opportunity to elect to have a portion of their
salary paid directly into the Plan on their behalf by the Company and the other
Employers. This Plan is intended to qualify as a profit sharing plan under
Section 401(a) of the Code and contains a cash or deferred arrangement intended
to qualify under Section 401(k) of the Code.
The Trust Agreement entered into in connection with this Plan shall continue in
full force and effect pursuant to the applicable provisions of the Plan and is
incorporated by reference and made part of this Plan.
The Plan is subject to amendment or termination at any time pursuant to
Article 14, including (without limitation) amendments to meet regulations and
rules issued by the Secretary of the Treasury or his delegate or the Secretary
of Labor. Certain capitalized terms used in the text of the Plan are defined in
Article 2 in alphabetical order.
<PAGE>
ARTICLE 2
DEFINITIONS
The following words and phrases as used herein shall have the following meanings
and the masculine and feminine gender shall be deemed to include the others,
unless a different meaning is plainly required by the context:
2.1 "Accounts" means the accounts that are maintained for a Participant
(or former Participant) under the Plan, including the Deferred Salary Account,
the Rollover Account, the After-Tax Contribution Account and the Employer
Account.
2.2 "Account Balance" means the sum of the amounts credited to a
Participant's (or former Participant's) Accounts, including interest and
earnings as of any date.
2.3 "Actual Deferral Percentage" means the ratio (expressed as a
percentage) of the Deferred Salary Contributions made on behalf of the
Participant for the Plan Year to the Participant's Compensation for the Plan
Year.
2.4 "Adjustment Factor" means the cost of living adjustment factor
prescribed by the Secretary of the Treasury under Section 415(d) of the Code for
years beginning after December 31, 1987, as applied to such items and in such
manner as the Secretary shall provide.
2.5 "Administrator" means the individual or committee described in
Article 13 which is responsible for the administration of the Plan.
2.6 "Affiliated Group" means a group of one or more chains of corporations
connected through stock ownership with the Company, if:
(A) Stock possessing at least 80% of the total combined voting power
of all classes of stock entitled to vote or at least 80% of the total value of
shares of all classes of stock of each of the corporations, except the Company,
is owned by one or more of the other corporations; and
(B) The Company owns stock possessing at least 80% of the total
combined voting power of all classes of stock entitled to vote or at least 80%
of the total value of shares of all classes of stock of at least one of the
other corporations excluding, in computing such voting power or value, stock
owned directly by such other corporations.
In addition, the term 'Affiliated Group' includes any other entity
that the Company has designated in writing as a member of the Affiliated Group
for purposes of the Plan. An entity shall be considered a member of the
Affiliated Group only with respect to periods for which such designation is in
effect or during which the relationship described in Paragraphs (A) and (B)
above exists.
2.7 "After-Tax Contributions" means any amounts contributed to the Plan by
the Participant pursuant to Section 4.7.
2.8 "After-Tax Contribution Account" means the Account described in
Section 4.7.
<PAGE>
2.9 "After-Tax Contribution Election" means the election made by a
Participant pursuant to Article 4.8.
2.10 "Annuity Starting Date" means the first day of the first period for
which an amount is payable as an annuity or, in the case of a benefit not
payable as an annuity, the first day on which all events have occurred which
entitle the Participant to such benefit.
2.11 "Average Actual Deferral Percentage" means the average (expressed as a
percentage) of the Actual Deferral Percentages of the Participants in a group.
2.12 "Average Contribution Percentage" means the average (expressed as a
percentage) of the Contribution Percentages of the Participants in a group.
2.13 "Beneficiary" means the person, persons or entity designated in
writing by the Participant (or by the Plan) pursuant to Article 8.
2.14 "Board of Directors" means the Board of Directors of the Company, as
constituted from time to time.
2.15 "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
2.16 "Company" means Foundation Health Corporation.
2.17 "Compensation" means the total compensation received from the Employer
for personal services rendered by a Participant during the Plan Year, including
base salary, bonuses, commissions, overtime, shift differentials and amounts
contributed to the Plan as Deferred Salary Contributions and After-Tax
Contributions.
By way of illustration, but not by way of limitation, amounts not
included in the definition of Compensation include relocation bonuses, author
incentives, auto allowances or referral bonuses, income realized as a result of
participation in any stock option, stock purchase or similar arrangement
maintained by the Employer and tuition or other reimbursements.
The foregoing provision notwithstanding, for purposes of determining a
Participant's Actual Deferral Percentage used in performing the average deferral
percentage nondiscrimination test described in Section 4.4 (and Section
401(k)(3) of the Code) and his or her Contribution Percentage used in performing
the average contribution percentage nondiscrimination test described in
Section 5.3 (and Section 401(m)(2) of the Code), Compensation means the total
compensation paid to the Participant by the Employer, other than compensation in
the form of qualified or previously qualified deferred compensation, that is
currently includable in the gross income of the Participant for income tax
purposes.
<PAGE>
Compensation for a Plan Year shall not exceed $150,000 (or such other
amount as may be adopted by the Commissioner of Internal Revenue under Section
401(a)(17) of the Code). For purposes of the preceding sentence, Compensation
of an individual who is one of the 10 most highly compensated Highly Compensated
Employees or a five-percent owner shall be deemed to include the Compensation of
such individual's spouse and any descendants under age 19. If such aggregated
Compensation exceeds the Code Section 401(a)(17) limit, then the Compensation
taken into account under the Plan for the individuals in each family aggregation
group shall be reduced to meet such limit, and the reduced amount of
Compensation taken into account be allocated among such individuals in
proportion to Compensation (without regard to family aggregation).
2.18 "Contribution Percentage" means the ratio (expressed as a percentage)
of the Employer Matching Contributions and After-Tax Contributions made under
the Plan on behalf of the Participant for the Plan Year to the Participant's
Compensation for the Plan Year.
2.19 "Deferral Election" means the portion of the enrollment application on
which a Participant authorizes and elects the percentage of his Compensation to
be withheld by the Employer and contributed on behalf of the Participant to his
Deferred Salary Account.
2.20 "Deferred Salary Account" means the Account described in Section 4.1.
2.21 "Deferred Salary Contribution" means the amount withheld from the
Compensation of a Participant and contributed by the Employer on behalf of a
Participant pursuant to Section 4.1.
2.22 "Disability Retirement Date" means a Participant's Retirement Date,
which shall be the first of any month following a Participant's termination of
employment after becoming Disabled.
2.23 "Disabled" mean a physical or mental condition which totally and
permanently prevents a Participant from engaging in any substantial gainful
employment, provided the Participant is eligible for, and is receiving,
disability benefits under the Social Security Act.
2.24 "Early Retirement Date" means a Participant's Retirement Date, which
shall be the first of any month coincident with or following termination of
employment and attainment of his 55th birthday.
2.25 "Effective Date" means April 1, 1989.
2.26 "Employee" means any employee of an Affiliated Group member except the
following:
(A) Any employee who is included in a unit of employees covered by an
agreement that the Secretary of Labor finds to be a collective bargaining
agreement between employee representative and an Employer if there is evidence
that retirement benefits were the subject of good faith bargaining between the
employee representative and the Employer; and
(B) Any person who is an independent contractor; and
(C) Any employee who is a nonresident alien who receives no earned
income (within the meaning of Section 911(d)(2) of the Code) from the Employer
which constitutes income from sources within the United States; and
(D) Any other group of individuals that the Company has designated in
writing as ineligible for Employee status.
Notwithstanding the foregoing, the term 'Employee' shall also include
Leased Employees; provided, however, if such Leased Employees constitute less
than twenty (20) percent of the Affiliated Group's Nonhighly Compensated
Workforce, then the term 'Employee' shall not include such Leased Employees as
are covered by a safe harbor plan under Code Section 414(n)(5).
<PAGE>
2.27 "Employer" means the Company and each other member of the Affiliated
Group which has been designated as an Employer by the Company and which has
elected to contribute to the Plan. In addition, a particular division or
separate operating unit of a member of the Affiliated Group may be designated as
a separate Employer from the Affiliated Group member of which it is a part,
including the ability to make separate elections as to the amount of Employer
Contributions. A member of the Affiliated Group and/or a division or separate
operating unit of an existing Employer may be designated as a separate Employer
as of the first day of any calendar month only if the designation is made before
such date.
2.28 "Employer Account" means the account into which Employer Contributions
made on behalf of a Participant pursuant to Article 5, and earnings on those
contributions, shall be credited.
2.29 "Employer Contributions" means "Employer Discretionary Contributions"
and/or "Employer Matching Contributions" contributed on behalf of a Participant
as described in Article 5.
2.30 "Employment Commencement Date" means the date on which an Employee
first performs an Hour of Service for an Affiliated Group member.
2.31 "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
2.32 "Family Member" means the spouse, lineal ascendants and descendants of
the Employee and the spouse of such lineal ascendants and descendants.
2.33 "FHC Stock" means the common stock, $0.01 par value, of the Company.
2.34 "FHC Stock Fund" means a part of the Trust Fund, as described in
Section 7.2. The FHC Stock Fund shall be invested and reinvested exclusively in
FHC Stock, except that, pending investment in FHC Stock, amounts designated for
investment in the FHC Stock Fund may be invested temporarily in interest-bearing
short-term investment instruments selected by the Trustee.
2.35 "Highly Compensated Employee" for any Plan Year means:
(A) Any active Employee who was a five percent (5%) owner at any time
during the look-back year or the determination year;
<PAGE>
(B) Any active Employee who, during the look-back year:
(1) Received Total Compensation Plus Deferrals of more than
$75,000 (or such larger amount as may be adopted by the Commissioner of Internal
Revenue to reflect a cost-of-living adjustment);
(2) Received Total Compensation Plus Deferrals of more than
$50,000 (or such larger amount as may be adopted by the Commissioner of Internal
Revenue to reflect a cost-of-living adjustment) and was a member of the Top-Paid
Group; or
(3) Was an officer of a member of the Affiliated Group and
received Total Compensation Plus Deferrals of more than fifty percent (50%) of
the dollar limitation in effect under Section 415(b)(1)(A) of the Code; and
(C) Any active Employee who, during the determination year:
(1) Met one of the three requirements set forth in Paragraph (B)
above; and
(2) Was one of the 100 Employees who received the highest Total
Compensation Plus Deferrals from the Affiliated Group.
If no officer has satisfied the Total Compensation Plus Deferrals
requirement of Subparagraph (B)(3) above during a determination year or a look-
back year (as the case may be), then the highest paid officer for such year
shall be treated as a Highly Compensated Employee.
If an Employee is, during a determination year or a look-back year, a
Family Member of a five percent (5%) owner who is an active or former Employee
or of a Highly Compensated Employee who is one of the 10 most Highly Compensated
Employees ranked on the basis of Total Compensation Plus Deferrals paid during
such year, then the Family Member and the five percent (5%) owner or top-10
Highly Compensation Employee shall be aggregated. In that event, the Family
Member and the five percent (5%) owner or top-10 Highly Compensated Employee
shall be treated as a single Employee receiving the compensation and Plan
contributions of the Family Member and the five percent (5%) owner or top-10
Highly Compensated Employee.
For purposes of this Section 2.35, the determination year shall be the
Plan Year. The look-back year shall be the 12-month period immediately
preceding the determination year.
The term 'Highly Compensated Employee' shall also include a former
Employee who separated from service (or was deemed to have separated from
service) prior to the determination year, performs no service for any member of
the Affiliated Group during the determination year, and was a Highly Compensated
Employee as an active Employee for either the separation year or any
determination year ending on or after the Employee's 55th birthday.
The determination of who is a Highly Compensated Employee, including
the determinations of the number and identity of Employees in the Top-Paid
Group, the top 100 Employees, the number of Employees treated as officers and
the Total Compensation Plus Deferrals that is considered, shall be made in
accordance with Section 414(q) of the Code and the regulations thereunder.
2.36 "Hour of Service" means each hour for which an Employee is directly or
indirectly paid or entitled to payment for the performance of duties for an
Affiliated Group member.
<PAGE>
2.37 "Investment Funds" means, to the extent applicable, one or more of the
FHC Stock Fund and the other investment funds offered under the Plan.
2.38 "Leased Employee" means an individual (i) who does not have a common-
law employment relationship with a member of the Affiliated Group, (ii) who has
provided services to a member or members of the Affiliated Group of a type
performed by individuals who are common-law employees of members of the
Affiliated Group, on a substantially full-time basis for a period of at least
one year and (iii) who provides services to a member or members of the
Affiliated Group pursuant to an agreement between a member or members of the
Affiliated Group and another individual.
2.39 "Leave of Absence" means an absence authorized by the Employer under
its standard personnel practices as applied in an uniform and non-discriminatory
manner to all persons similarly situated, provided the Employee resumes service
with the Employer within the period specified in the authorization for the Leave
of Absence.
For purposes of determining an Employee's Severance From Service Date,
a Leave of Absence shall not exceed a period of twelve (12) consecutive months.
Service in the Armed Forces of the United States of America shall constitute an
authorized leave of absence provided (i) the Employee leaves the employ of the
Employer to enter the service of the Armed Forces of the United States of
America through the operation of a compulsory military service law or pursuant
to leave granted by the Employer, and (ii) the Employee returns to the employ of
the Employer within the period provided by law for the protection of his re-
employment rights.
2.40 "Married Participant" means a Participant who is lawfully married on
the date benefits are elected or become payable under the Plan.
2.41 "Matching Rate" is defined in Paragraph (A) of Section 5.2.
2.42 "Nonhighly Compensated Employee" shall mean an Employee who is neither
a Highly Compensated Employee nor a Family Member.
2.43 "Normal Retirement Age" means age 65.
2.44 "Normal Retirement Date" means the first day of the month coincident
with or next following a Participant's attainment of Normal Retirement Age.
2.45 "One-Year Period of Severance" means a twelve (12) consecutive month
period beginning on a Severance From Service Date and ending on the first
anniversary of such date, provided the Employee has not performed an Hour of
Service for an Affiliated Group member during such period.
2.46 "Participant" means an Employee who becomes a Participant pursuant to
Article 3 and who continues to be entitled to any benefits under the Plan.
2.47 "Participation Commencement Date" means the date on which an Employee
first becomes a Participant, which shall be the first day of January, April,
July or October.
2.48 "Period of Service" means a period of service commencing on an
Employee's Employment Commencement Date or Reemployment Commencement Date,
whichever is applicable, and ending on his Severance From Service Date. All
Periods of Service shall be aggregated.
<PAGE>
If an Employee severs from service by reason of a quit, discharge, or
retirement and the Employee then performs an Hour of Service within twelve (12)
months of the Severance From Service Date, then such Period of Severance shall
be taken into account for purposes of eligibility and vesting.
2.49 "Period of Severance" means the period of time commencing on an
Employee's Severance From Service Date and ending on the date on which the
Employee again performs an Hour of Service for an Affiliated Group member.
2.50 "Plan" means this Foundation Health Corporation Profit Sharing and
401(k) Plan, as amended and restated from time to time.
2.51 "Plan Year" means the calendar year.
2.52 "Postponed Retirement Date" means a Participant's Retirement Date,
which shall be the first of any month coincident with or next following his
termination of employment after his Normal Retirement Date.
2.53 "Prior Plan" means the CPI Profit Sharing Plan, as in effect
immediately prior to the Effective Date.
2.54 "Qualified Joint and Survivor Annuity" (or "QJSA") means an annuity
payable for the life of the Participant with a survivor annuity for the life of
the Surviving Spouse which is equal to at least 50%, but no more than 100%, of
the annuity payable during the joint lives of the Participant and Spouse that
can be purchased with the Participant's Account Balance.
2.55 "Qualified Matching Contribution" and "Qualified Nonelective
Contribution" means an Employer Contribution described in Section 5.1(D) which
is subject to the nonforfeitability and distribution limitations of Treasury
Regulation Section 1.401(k)-1(c) and (d).
2.56 "Reemployment Commencement Date" means the first day following a
Period of Severance on which an Employee performs an Hour of Service for an
Employer.
2.57 "Retirement Date" means a Participant's date of actual retirement
which shall be his Normal Retirement Date, Early Retirement Date, Postponed
Retirement Date or Disability Retirement Date, whichever is applicable.
2.58 "Rollover Account" means the Account described in Article 16.
2.59 "Rollover Contribution" means the contributions received by the Plan
from a Participant pursuant to Article 16 and maintained in the Rollover
Account.
2.60 "Severance From Service Date" means the earlier of:
(A) The date on which an Employee quits, retires, is discharged, or
dies; or
(B) (1) The first anniversary of the first day of a period in which
an Employee remains absent from service (with or without pay) with the
Affiliated Group member for any reason other than quit, retirement, discharge or
death, such as vacation, holiday, sickness, disability, Leave of Absence or lay-
off; or
(2) The second anniversary of the first day of a period in which
an Employee remains absent from service (with or without pay) with an Affiliated
Group member by reason of pregnancy, the birth of the Employee's child, the
placement of a child with the Employee in connection with the adoption of such
child by such Employee, or the need to care for such Employee's child during the
period immediately following such child's birth or placement.
<PAGE>
A Participant shall receive credit under the Plan for an
absence from service under the foregoing paragraph on account of pregnancy, the
birth of the Employee's child, child placement or child care, effective on or
after January 1, 1985, provided, however, that the Participant shall not be so
credited unless such Employee furnishes the Administrator such timely
information as the Administrator may require to establish that the absence from
employment is for such reasons.
2.61 "Spouse" or "Surviving Spouse" means a Participant's current spouse or
surviving spouse, provided, however, that a former spouse will be treated as a
Spouse or Surviving Spouse to the extent provided under a qualified domestic
relations order as described in Section 414(p) of the Code and procedures
adopted by the Company.
2.62 "Top-Paid Group" for any Plan Year means the top 20% (in terms of
Total Compensation Plus Deferrals) of all Employees of the Affiliated Group,
excluding the following:
(A) Any Employee covered by a collective bargaining agreement who is
not eligible to become a Participant;
(B) Any Employee who is a nonresident alien with respect to the
United States who receives no income from a source within the United States from
a member of the Affiliated Group;
(C) Any Employee who has not completed a six-month Period of Service
at the end of the Plan Year;
(D) Any Employee who normally works less than 17 hours per week;
(E) Any Employee who normally works not more than six months during a
year; and
(F) Any Employee who has not attained the age of 21 at the end of the
Plan Year.
2.63 "Total Compensation" means "wages" as defined in Section 3401(a) of
the Code for purposes of income tax withholding at the source, but determined
without regard to any rules that limit the remuneration included in "wages"
based on the nature or location of the employment or the services performed
(such as the exception for agricultural labor in Section 3401(a)(2) of the
Code). Total Compensation shall be subject to the $150,000 limit described in
Section 2.17.
2.64 "Total Compensation Plus Deferrals" means Total Compensation as
defined in the preceding Section 2.63, but modified:
(A) To include all amounts deferred but not refunded under a
cafeteria plan, as such term is defined in Section 125(c) of the Code, or under
a plan, including this Plan, qualified under Section 401(k) of the Code; and
(B) To include Total Compensation for each Plan Year in excess of the
$150,000 limit described in Section 2.17 above.
2.65 "Trust Agreement" means the trust agreement between the Company and
the Trustee, established for the purpose of funding benefits under the Plan, or
any successor trust agreement or agreements.
2.66 "Trustee" means the trustee acting as such pursuant to the Trust
Agreement, or any successor or successors.
2.67 "Trust Fund" means all such money or other property which is held by
the Trustee, pursuant to the terms of the Agreement.
2.68 "Valuation Date" means the last business day of each month.
2.69 "Year of Service" means a Period of Service equal to three hundred
sixty-five (365) days of service included in a Period of Service.
<PAGE>
ARTICLE 3
PARTICIPATION
3.1 PLAN ENTRY DATE
(A) An Employee other than a Leased Employee, who was a Participant
in the Prior Plan immediately prior to the Effective Date shall become a
Participant in the Plan on the Effective Date.
(B) An Employee other than a Leased Employee not described in
subsection (A) shall become a Participant in the Plan on the first Participation
Commencement Date following the date on which he performs an Hour of Service for
an Employer; provided, however that if such Participation Commencement Date
shall occur within a period during which the Employee is absent from service for
any reason other than a quit, discharge or retirement, then such Employee shall
become a Participant retroactively as of such Participation Commencement Date on
the date he subsequently performs an Hour of Service for an Employer. The
foregoing notwithstanding, an Employer which has become an Affiliated Group
member as the result of a merger, acquisition, consolidation or similar
transaction with the Company, may designate the Participation Commencement Date
as of which any of its Employees, other than Leased Employees, shall first
commence participation in the Plan.
3.2 REHIRED EMPLOYEE
A Participant whose participation ceased because of a separation from
service and who again becomes an Employee shall become eligible to participate
on his Reemployment Commencement Date. Deferred Salary Contributions and/or
After-Tax Contributions shall be made on behalf of such Participant as soon as
administratively practicable after the Participant records the appropriate
elections with the Administrator.
3.3 LOSS OF PARTICIPANT STATUS
An Employee who becomes a Participant shall continue to be a
Participant in the Plan until his entire plan benefit has been distributed,
whether or not he continues to make Deferred Salary Contributions or After-Tax
Contributions.
3.4 SUSPENSION OF PARTICIPATION
A Participant who ceases to be an Employee but remains an employee of
an Employer shall be a "suspended participant" and shall have his participation
suspended. A suspended participant shall not be entitled to make After-Tax
Contributions to the Plan, to have Deferred Salary Contributions made on his
behalf to the Plan, or to receive an allocation of Employer Contributions.
During the period of suspension, the suspended participant's service shall
continue to be considered for Plan vesting purposes and investment earnings
shall continue to accrue with respect to the suspended participant's Account.
The suspension shall be removed and a suspended participant shall
again become eligible to participate and elect to make Deferred Salary
Contributions and/or After-Tax Contributions when he again becomes an Employee
by completing a new Deferral Election and After-Tax Contribution Election.
<PAGE>
ARTICLE 4
DEFERRED SALARY CONTRIBUTIONS AND AFTER-TAX CONTRIBUTIONS
4.1 DEFERRED SALARY CONTRIBUTIONS
(A) Subject to the limitations established by this Article and
Article 5, each Participant who is not a Highly Compensated Employee may elect
to have his Employer contribute from two percent (2%) to ten percent (10%) of
the Participant's Compensation directly into the Plan instead of paying such
amount to the Participant. Contributions made in this manner shall be called
Deferred Salary Contributions. Subject to the limitations established by this
Article and Article 5, each Participant who is a Highly Compensated Employee may
elect to have his or her Employer contribute from two percent (2%) to six
percent (6%) of such Participant's Compensation directly into the Plan instead
of paying such amount to the Participant. A Participant's Deferred Salary
Contributions shall be credited to his Deferred Salary Account.
(B) All Deferred Salary Contributions shall be forwarded by the
Employer to the Trustee as soon as administratively practicable after the
contributions have been withheld. In no event shall Deferred Salary
Contributions be forwarded to the Trustee later than ninety (90) days from the
date on which such amounts were withheld and would have otherwise been payable
to the Participant as Compensation.
(C) Notwithstanding the foregoing, no Participant's Deferred Salary
Contributions during any Plan Year (not including any Deferred Salary
Contributions distributed to any Participant for the Plan Year ending with such
calendar year pursuant to Section 12.1), together with any other elective
deferrals (within the meaning of Section 402(g)(3) of the Code) under all plans,
contracts or arrangements of the Affiliated Group, shall exceed $9,240 (or such
larger amount as may be provided on account of cost-of-living adjustments
pursuant to Sections 402(g)(5) and 415(d) of the Code. The limitation set by
this paragraph (C) applies on an individual basis to all elective deferrals made
by each Participant during a year under this or any other qualified plan.
(D) It shall be the responsibility of each Participant to coordinate
his or her salary deferrals as needed to meet this limit in connection with any
other plan or plans. The Company will not take account of deferrals made to any
other plan and, except as required by law, no deferrals made under this Plan
will be returned because the Participant's deferrals under another plan caused
his total deferrals for a year to exceed the limit set forth in subsection (C),
above.
4.2 DEFERRAL ELECTION
Each Participant may deliver to the Administrator a Deferral Election
in accordance with procedures prescribed by the Administrator, directing his
Employer to reduce his Compensation within the limits set forth in Section 4.1.
Such election shall become effective as of the date agreed upon between the
Administrator and the Participant, provided that such date shall be subsequent
to receipt of the Deferral Election by the Administrator.
4.3 SUSPENSION OF, OR CHANGE IN, DEFERRAL ELECTION
(A) SUSPENSION. A Participant may elect to suspend all Deferred
Salary Contributions at any time by giving notice to the Administrator in a
manner prescribed for that purpose by the Administrator. Any such election
shall be effective as soon as administratively practicable following the date
such notice is received by the Administrator.
By giving the Administrator such advance notice as may be
prescribed by the Administrator, a Participant who has suspended all Deferred
Salary Contributions may resume such contributions as of the first day of the
calendar quarter next following receipt of such notice by the Administrator.
(B) CHANGE OF DEFERRAL PERCENTAGE. A Participant may elect to change
the amount of his Deferred Salary Contribution on any January 1, April 1, July 1
or October 1, provided the Participant gives such prior notice to the
Administrator as may be required by the Administrator in accordance with
procedures established by the Administrator. The new deferral amount shall
become effective as of the January 1, April 1, July 1 or October 1 following the
expiration of the notice period with respect to contributions made subsequent to
that January 1, April 1, July 1 or October 1.
4.4 DEFERRAL PERCENTAGE LIMITATION
Subject to the special rules of Section 4.5 and at such intervals as
it shall deem proper, the Administrator shall review each Participant's Deferral
Election in order to determine that the Deferred Salary Contributions with
respect to all Participants satisfy one of the following tests:
(A) The Average Actual Deferral Percentage for Participants who are
Highly Compensated Employees for the Plan Year shall not exceed the Average
Actual Deferral Percentage for Participants who are Nonhighly Compensated
Employees for the Plan Year multiplied by 1.25; or
(B) The Average Actual Deferral Percentage for Participants who are
Highly Compensated Employees for the Plan Year shall not exceed the Average
Actual Deferral Percentage for Participants who are Nonhighly Compensated
Employees for the Plan Year multiplied by 2, provided that the Average Actual
Deferral Percentage for Participants who are Highly Compensated Employees does
not exceed the Average Actual Deferral Percentage for Participants who are
Nonhighly Compensated Employees by more than 2 percentage points.
Notwithstanding the foregoing, the limit set forth in this subsection (B) shall
be adjusted in accordance with Treasury Regulation Section 1.401(m)-2 to avoid
duplicate use of the limit for any Highly Compensated Employee.
4.5 SPECIAL RULES ON DEFERRAL PERCENTAGE LIMITATION
(A) For purposes of this Article, the Actual Deferral Percentage for
any Participant who is a Highly Compensated Employee for the Plan Year and who
is eligible to have Deferred Salary Contributions allocated to his account under
two or more plans or arrangements described in Section 401(k) of the Code that
are maintained by the Employer or an affiliated Employer shall be determined as
if all such Deferred Salary Contributions were made under a single arrangement.
<PAGE>
(B) For purposes of determining the Actual Deferral Percentage of an
Employee who is a Highly Compensated Employee to the extent provided in Code
Section 414(q)(6)(A), the Deferred Salary Contributions and Compensation of such
Employee shall include the Deferred Salary Contributions and Compensation of
Family Members; and such Family Members shall be disregarded in determining the
Average Actual Deferral Percentage for Participants who are Nonhighly
Compensated Employees.
(C) The determination and treatment of the Deferred Salary
Contributions and Actual Deferral Percentage of any Participant shall satisfy
such other requirements as may be prescribed by the Secretary of the Treasury.
(D) In the event that this Plan is aggregated with one or more other
plans in order to satisfy the requirements of Code Sections 401(a), 401(k) or
410(b), then all such aggregated plans, including the Plan, shall be treated as
a single plan for all purposes under all such Code Sections (except for purposes
of the average benefit percentage provisions in Code Section 410(b)(2)(A)(ii).
4.6 ADJUSTMENT OF DEFERRALS
In the event the Administrator determines that one of the tests set
forth in Section 4.4 is not satisfied at the time of its review hereunder, it
may require that one or more Participants adjust their Deferral Election for the
next and subsequent payroll periods, in order that the test set forth in Section
4.4(A) or (B) is thereafter satisfied. In addition, Article 12 shall apply if,
at the end of the Plan Year, a test in Section 4.4(A) or (B) above is not
satisfied.
4.7 AFTER-TAX CONTRIBUTIONS
(A) Subject to the limitations set forth in Sections 5.3 and 5.5,
each Participant who is not a Highly Compensated Employee may contribute from
two percent (2%) to ten percent (10%) of the Participant's Compensation to the
Plan as After-Tax Contributions. A Participant's After-Tax Contributions shall
be credited to his After-Tax Contributions Account. Subject to the limitations
set forth in Sections 5.3 and 5.5, each Participant who is a Highly Compensated
Employee may contribute from two percent (2%) to six percent (6%) of such
Participant's Compensation to the Plan as After-Tax Contributions.
(B) All After-Tax Contributions shall be forwarded by the Employer to
the Trustee as soon as administratively practicable but in no even later than
ninety (90) days from the date on which such amounts were withheld and would
have otherwise been payable to the Participant as Compensation.
4.8 AFTER-TAX CONTRIBUTION ELECTION
Each Participant may make an After-Tax Contribution Election in
accordance with procedures prescribed by the Administrator directing his
Employer to withhold After-Tax Contributions from the Participant's Compensation
within the limits set forth in Section 4.7(A). Such election shall become
effective as of a date agreed upon between the Administrator and the
Participant, provided that such date shall be subsequent to the receipt of the
election by the Administrator.
4.9 SUSPENSION OF, OR CHANGE IN, AFTER-TAX CONTRIBUTIONS
(A) A Participant may elect to suspend After-Tax Contributions at any
time by giving notice to the Administrator in accordance with the procedures
established for that purpose by the Administrator. Any such election shall be
effective as soon as administratively practicable following the date such notice
is received by the Administrator. By giving the Administrator such advance
notice as the Administrator may require, a Participant who has suspended all
After-Tax Contributions may resume After-Tax Contributions as of the first day
of the calendar quarter next following receipt of such notice by the
Administrator.
(B) A Participant may elect to change the amount of his After-Tax
Contributions on any January 1, April 1, July 1, or October 1, provided the
Participant gives such advance notice as the Administrator may require in
accordance with procedures established by the Administrator. The new
contribution amount shall become effective as of the January 1, April 1, July 1,
or October 1 following the expiration of the notice period with respect to
contributions made subsequent to that January 1, April 1, July 1, or October 1.
<PAGE>
ARTICLE 5
EMPLOYER CONTRIBUTIONS
5.1 EMPLOYER DISCRETIONARY CONTRIBUTIONS
(A) Employer Discretionary Contributions, if any, for each Plan Year
shall be made in such amounts (or under such formula) as each Employer shall
determine annually in its discretion; provided, however, that such Employer
Discretionary Contributions shall not be made for any Plan Year in amounts which
cannot be allocated to any Participant's Account by reason of the limitation
described in Sections 5.5 and 5.6.
(B) All Employer Discretionary Contributions shall be invested in
accordance with the provisions of Article 6 and shall be made in cash or FHC
Stock or a combination of cash and FHC Stock.
(C) Subject to the limitations otherwise contained in this Article,
Employer Discretionary Contributions made pursuant to this Section shall be
allocated to the Employer Account of each Participant who is an Employee of the
Employer on the last business day of the Plan Year. A Participant who has a
Severance From Service Date during the Plan Year because of death or retirement
on a Retirement Date shall be deemed to be an Employee on the last business day
of the Plan Year. If Employer Discretionary Contributions are made in FHC
Stock, FHC Stock shall be valued at the last-transaction price on the New York
Stock Exchange (or such other national securities exchange on which the
Company's stock is primarily trading) and reported by The Wall Street Journal
with respect to the date as of which Employer Discretionary Contributions are
allocated to Employer Accounts under this Section. If the Valuation Date falls
on other than a trading day, FHC Stock shall be valued as of the most recent
trading day preceding the Valuation Date.
(D) Employer Discretionary Contributions made pursuant to this
Section shall be allocated in the manner designated by the Employer at the time
such contribution is made; provided, however, that such manner of allocation
does not discriminate in favor of Participants who are Highly Compensated
Employees. It is the intention of the Company and the other Employers that
Employer Discretionary Contributions be allocated either (i) to all Participants
of the Employer in the proportion that the Compensation of each such Participant
for the Plan Year bears to the total Compensation of all of such Participants
for such Plan Year, or (ii) as Qualified Nonelective Contributions or Qualified
Matching Contributions to be allocated only to certain Nonhighly Compensated
Employees as designated by the Employer for the purpose of ensuring that the
Plan satisfies the deferral percentage and contribution percentage limitations
described in Sections 4.4 and 5.3. If no allocation method is specified at the
time of contribution, Qualified Nonelective Contributions and Qualified Matching
Contributions will be allocated to Nonhighly Compensated Employees based upon
Compensation in accordance with Section 5.1(D)(i) above.
<PAGE>
5.2 EMPLOYER MATCHING CONTRIBUTIONS
(A) For each calendar month, each Employer may make an Employer
Matching Contribution to the Plan. The amount of an Employer's Matching
Contribution for a calendar month shall be equal to:
(1) The Employer's Matching Rate multiplied by the aggregate of
the Deferred Salary Contributions and/or After-Tax Contributions (as limited by
Section 5.3) made for such month by all Participants employed by the Employer
during such month; less
(2) Any forfeiture from Employer Accounts attributable to former
Employees of the Employer.
Monthly Deferred Salary Contributions and/or After-Tax
Contributions on behalf of each Participant in excess of 6% of his or her
Compensation for such month shall be disregarded.
For purposes of this Paragraph (A) of this Section 5.2, the
'Matching Rate' means a percentage from 0% to 100%, as determined by each
Employer for a Plan Year or for the balance of a Plan Year. An Employer's
Matching Rate shall remain in effect until changed by the Employer to another
permissible rate.
5.3 PERCENTAGE LIMITATION ON EMPLOYER MATCHING CONTRIBUTIONS AND AFTER-TAX
CONTRIBUTIONS
At such intervals as it shall deem proper, the Administrator shall
review the Employer Matching Contributions made for Participants in order to
determine that such Employer Matching Contributions and After-Tax Contributions,
with respect to all Participants, satisfy one of the following tests:
(A) The Average Contribution Percentage for Participants who are
Highly Compensated Employees for the Plan Year shall not exceed the Average
Contribution Percentage for Participants who are Nonhighly Compensated Employees
for the Plan Year multiplied by 1.25; or
(B) The Average Contribution Percentage for Participants who are
Highly Compensated Employees for the Plan Year shall not exceed the Average
Contribution Percentage for Participants who are Nonhighly Compensated Employees
for the Plan Year multiplied by 2, provided that the Average Contribution
Percentage for Participants who are Highly Compensated Employees does not exceed
the Average Contribution Percentage for Participants who are Nonhighly
Compensated Employees by more than 2 percentage points. Notwithstanding the
foregoing, the limit set forth in this subsection (B) shall be adjusted in
accordance with Treasury Regulation Section 1.401(m)-2 to avoid duplicate use of
the limit for any Highly Compensated Employee.
5.4 SPECIAL RULES FOR CONTRIBUTION PERCENTAGE LIMIT TESTING
(A) For purposes of this Article, the Contribution Percentage for any
Participant who is a Highly Compensated Employee for the Plan Year and who is
eligible to make After-Tax Contributions or to receive Employer Matching
Contributions allocated to his Account under two or more plans described in
Section 401(a) of the Code that are maintained by the Employer shall be
determined as if all such After-Tax Contributions and Employer Matching
Contributions were made under a single plan.
<PAGE>
(B) In the event that this Plan satisfies the requirements of Section
410(b) of the Code only if aggregated with one or more other plans, or if one or
more other plans satisfy the requirements of Section 410(b) of the Code only if
aggregated with this Plan, then this Article shall be applied by determining the
Contribution Percentages of Participants as if all such plans were a single
plan.
(C) For purposes of determining the Contribution Percentage of a
Participant who is a Highly Compensated Employee, After-Tax Contributions,
Employer Matching Contributions and Compensation of such Participant shall
include the After-Tax Contributions, Employer Matching Contribution and
Compensation of Family Members, and such Family Members shall be disregarded in
determining the Contribution Percentage for Participants who are Nonhighly
Compensated Employees.
(D) The determination and treatment of the Contribution Percentage of
any Participant shall satisfy such other requirements as may be prescribed by
the Secretary of the Treasury.
5.5 OVERALL LIMITATION ON ANNUAL ADDITIONS
Any other provision of this Plan notwithstanding, in no event shall
the Annual Additions allocated to a Participant for any Limitation Year exceed
the lesser of:
(A) Twenty-five percent (25%) of the Participant's Total Compensation
for the Limitation Year; or
(B) Thirty thousand dollars ($30,000) (or, if greater, 1/4 of the
amount in effect under Section 415(b)(1)(A) of the Code for such Limitation
Year.)
The compensation limitation referred to in Paragraph (A) shall not
apply to:
(1) Any contribution for medical benefits (within the meaning of
Section (A)(f)(2) of the Code) after separation from service which is otherwise
treated as an Annual Addition, or
(2) Any amount otherwise treated as an Annual Addition under
Section 415(l)(1) of the Code.
If a Participant's Annual Additions would exceed the foregoing
limitation, then such Annual Additions shall be reduced in the order in which
they are listed in Section 5.7(a). If a Participant's Annual Additions would
exceed the foregoing limitation as a result of a reasonable error in estimating
a Participant's Total Compensation or under other limited facts and
circumstances which the Commissioner of Internal Revenue finds justifies this
method of allocation, the excess amount shall be withheld or taken from a
Participant's Account and held in a suspense account to be used to reduce future
contributions for the Participant (or, if the Participant ceases to be an
Employee, for remaining active Participants) in succeeding Limitation Years, as
necessary.
<PAGE>
5.6 SPECIAL RULES
(A) PARTICIPATION IN OTHER DEFINED CONTRIBUTION PLAN. The limitation
of Section 5.5 and 5.6 with respect to any Participant who at any time has
participated in any other qualified defined contribution plan (as defined in
Section 3(34) of ERISA and Section 414(i) of the Code) maintained by the Company
shall apply as if the total contributions allocated under all such defined
contribution plans in which the Participant has participated were allocated
under one plan.
(B) PARTICIPATION IN THIS PLAN AND A DEFINED BENEFIT PLAN. If a
Participant has at any time been a participant in a qualified defined benefit
plan (as defined in Section 3(35) of ERISA and Section 414(j) of the Code) and
that is not part of a floor-offset arrangement (as defined in Section 414(k) of
the Code) maintained by the Company, the sum of the Participant's Defined
Benefit Plan Fraction and Defined Contribution Plan Fraction for any year shall
not exceed one (1).
In the event said sum of the Defined Benefit Plan Fraction and
the Defined Contribution Plan Fraction would otherwise exceed 1.0 for any Plan
Year, the projected annual retirement income benefit under the Company-sponsored
defined benefit plan shall be limited, to the extent necessary, to reduce said
Defined Benefit Plan Fraction so that the sum of the two fractions hereunder
does not exceed the foregoing 1.0 limitation.
For purposes of the foregoing paragraph only:
(1) The "Defined Benefit Plan Fraction" for any Limitation Year
is a fraction, the numerator of which is the Participant's projected annual
retirement income benefit under all defined benefit plans, maintained by the
Company determined as of the end of the Limitation Year, and the denominator of
which is the lesser of:
(a) The product of 1.25 multiplied by the dollar limitation
in effect under Code Section 415(b)(1)(A) for the Limitation Year; or
(b) The product of 1.4 multiplied by one hundred percent
(100%) of the Participant's average Total Compensation for the three (3)
consecutive calendar years during which his Total Compensation was the highest.
(2) The "Defined Contribution Plan Fraction" for any Limitation
Year is a fraction, the numerator of which is the sum of the Annual Additions to
the accounts of the Participant in all defined contribution plans maintained by
the Company (as of the end of the Limitation Year) for the Limitation Year and
all preceding Limitation Years, and the denominator of which is the sum of the
lesser of the following amounts, determined for such Limitation Year and for
each prior Limitation Year of service with the Company:
(a) The product of 1.25 multiplied by $30,000 (as adjusted
pursuant to Section 415(d)(1)(B)); or
(b) The product of 1.4 multiplied by twenty-five percent
(25%) of the Participant's Total Compensation for such Limitation Year.
(C) ADJUSTMENT OF LIMITATION FOR YEARS OF SERVICE OR PARTICIPATION
(1) In the case of a Participant who has completed less than ten
years of participation in any Company-sponsored defined benefit plans, the
limitation set forth in Section 5.6(B)(1)(a) shall be adjusted by multiplying
such amount by a fraction, the numerator of which is the Participant's number of
years (or part thereof) of participation in Company-sponsored defined benefit
plans and the denominator of which is ten.
(2) If a Participant has completed less than ten years of
service with the Company, the limitation set forth in Section 5.6(B)(1)(b) shall
be adjusted by multiplying such amount by a fraction, the numerator of which is
the Participant's number of years of service (or part thereof) and the
denominator of which is ten.
<PAGE>
5.7 DEFINITIONS
For purposes of Sections 5.5 and 5.6, the following definitions shall
apply:
(A) "Annual Addition" shall mean the amount allocated to a
Participant's Account during the Limitation Year that constitutes:
(1) Deferred Salary Contributions,
(2) After-Tax Contributions,
(3) Employer Contributions,
(4) voluntary contributions (if any)
(5) forfeitures, and
(6) amounts described in Section 415(l)(1) and 419A(d)(2) of the
Code.
Rollover Contributions shall not be included in Annual Additions.
(B) "Company" shall include any other employer or employers (whether
or not incorporated) which together with the Employers adopting the Plan are
under common control as members of the same controlled group of corporations or
affiliated service group as determined under Sections 414(b), (c) or (m) of the
Code, as modified by Section 415(h), but only for the period during which such
relationship exits.
(C) "Limitation Year" shall mean the Plan Year.
5.8 REVERSION OF EMPLOYER CONTRIBUTIONS
Except as provided in the following paragraphs (A), (B), and (C), the
assets of the Plan shall never inure to the benefit of any Employer, and shall
be held for the exclusive purposes of providing benefits to Participants and/or
their Beneficiaries, and for defraying the expenses of administering the Plan.
(A) In the case of an Employer Contribution which is made by virtue
of a mistake of fact, such contribution shall be returned to the Employer within
one (1) year after the payment of the contribution.
(B) Employer Contributions are conditioned upon the deductibility of
the contribution under Section 404 of the Code, or any successor provision
thereto and to the extent the deduction of such Employer Contribution is
disallowed such Employer Contribution (to the extent disallowed), shall be
returned to the Employer within one (1) year after such disallowance of the
deduction.
5.9 TIMING OF EMPLOYER CONTRIBUTIONS
The Employer shall forward Employer Discretionary Contributions and
Employer Matching Contributions to the Trustee for investment in the Trust Fund
at such times as the Employer shall determine, but not later than the time
prescribed by law for filing the Employer's Federal income tax return for the
Plan Year plus extensions.
<PAGE>
ARTICLE 6
PARTICIPANTS' ACCOUNTS
6.1 SEPARATE ACCOUNTS
The Administrator shall maintain or cause to be maintained separate
Accounts for each Participant which shall consist of his Deferred Salary
Account, After-Tax Contributions Account, Rollover Account and Employer Account.
To the extent necessary or appropriate, the Administrator may also maintain, or
cause to be maintained, on behalf of each Participant, a separate accounting as
to Employer Discretionary Contributions and Employer Matching Contributions
contributed to the Employer Account, the earnings and losses thereon and
expenses attributable thereto.
6.2 VALUATION OF FUNDS
There shall be determined as of each Valuation Date, but prior to
crediting of contributions made by each Employer and Employee since the
preceding Valuation Date, the fair market value of all assets of each of the
Investment Funds maintained pursuant to Article 7. The fair market value of FHC
Stock shall be the last transaction price on the New York Stock Exchange and
reported by The Wall Street Journal with respect to the Valuation Date. If the
Valuation Date falls on other than a trading day, FHC Stock shall be valued as
of the most recent trading day preceding the Valuation Date. Such valuation
shall be determined in accordance with the principles of Section 3(26) of ERISA
and shall give effect to brokerage fees, transfer taxes, contributions,
earnings, gains and losses, forfeitures, expenses, disbursements, and all other
transactions during the valuation period since the preceding Valuation Date.
In making such determinations and in crediting net appreciation or
depreciation to the Participant's Accounts, the Administrator may employ such
accounting methods as the Administrator may deem appropriate in order to fairly
reflect the fair market values of the Investment Funds and each Participant's
Account. For this purpose the Administrator may rely upon information provided
by the Trustee, the investment manager, or other persons believed by the
Administrator to be competent.
6.3 INVESTMENT OF CONTRIBUTIONS
A Participant shall make an investment election which shall cover his
Deferred Salary Contributions, After-Tax Contributions, Rollover Contributions
and Employer Contributions. The investment election shall be made in such
minimum percentages as may be established by the Company from time to time to be
invested in one or more of the Investment Funds available under the Plan. Any
investment election made by a Participant shall be a continuing direction until
changed in accordance with procedures established by the Company.
Each Participant is solely responsible for the selection of his
investment options. The Trustee, the Administrator, the Employer and the
officers, supervisors and other employees of the Employer are not empowered to
advise a Participant as to the manner in which his Account shall be invested.
The fact that an Investment Fund is available to a Participant for investment
under the Plan shall not be construed as a recommendation for investment in that
Investment Fund. In the event no election is made by a Participant, amounts
subject to his election will be invested by the Administrator in a money market
fund or such other offered fund which shall provide the most safety for purposes
of the protection of principal.
6.4 CHANGE OF INVESTMENT ELECTION
A Participant may change his investment directions as to his Account
Balances among and between the Investment Funds offered under the Plan in
accordance with procedures established by the Company from time to time.
6.5 RESTRICTIONS ON INVESTMENT ELECTIONS OF CERTAIN PARTICIPANTS
Any investment elections relating to FHC Stock that are made by
Participants who are officers, directors or ten percent shareholders of the
Company for purposes of Section 16(b) of the Securities Exchange Act of 1934
shall be subject to such restrictions as the Company may establish to enable
such Participants and the Plan to comply with, or qualify for an exemption from,
the restrictions of Section 16(b) of the Securities Exchange Act of 1934.
6.6 STATEMENTS
At least once annually the Administrator shall cause to be furnished
to each Participant a statement showing the status of his Accounts as of the
most recent Valuation Date and containing such other information as the
Administrator shall determine.
<PAGE>
ARTICLE 7
INVESTMENT OF FUNDS
7.1 TRUST AGREEMENT
(A) The Company shall enter into a Trust Agreement which shall be a
part of the Plan. All contributions made pursuant to the provisions of the Plan
shall be paid into the Investment Funds maintained pursuant to the Plan and the
Trust Agreement. All such payments and increments thereon shall be held and
disbursed in accordance with the provisions of the Plan and Trust Agreement, as
each shall be applicable under the circumstances. No person shall have any
interest in, or right to, any part of the funds so held in the Trust Fund,
except as expressly provided in the Plan or Trust Agreement.
(B) The Trustee shall have the exclusive authority and discretion to
invest, manage and control the assets of the Plan, except to the extent that
Participants have been given authority to direct the investment of their
Accounts pursuant to Article 6 and Sections 15.11 and 15.12 and to the extent
the Company has allocated the authority to manage Plan assets to one or more
investment managers (within the meaning of Section 3(38) of ERISA). Any
investment manager appointed by the Company shall have the exclusive authority
to manage, including the power to direct the acquisition and disposition of, the
Plan assets assigned to it by the Company. The Trustee may invest funds
received in a temporary investment fund, or any other fund selected by the
Trustee, until such time as he is directed to invest such funds by the
investment manager(s), if any.
(C) From time to time, the Company shall estimate the Plan benefits
and administrative expenses to be paid out of the Trust Fund during the period
for which the estimate is made and shall estimate the contributions to be made
to the Plan during such period by Participants and by participating Employers.
The Company shall inform the Trustee of the estimated cash needs of the Plan for
each period with respect to which such estimates are made. Such estimates shall
be made on an annual, quarterly, monthly or other basis, as the Company shall
determine.
7.2 TRUST FUND
The Trust Fund shall be comprised of one or more Investment Funds, as
determined from time to time by the Company, including (without limitation), the
FHC Stock Fund. Such Investment Funds may be evidenced by appropriate
bookkeeping entries or by a physical segregation of assets. At its discretion,
and in a nondiscriminatory manner, the Company may change or eliminate one or
more of the Investment Funds offered under the Plan.
7.3 INDEPENDENT QUALIFIED PUBLIC ACCOUNTANT
The Company shall engage an independent qualified public accountant to
conduct such examinations and to render such opinions as may be required by
Section 103(a)(3) of ERISA. The Company in its discretion may remove and
discharge the person so engaged, but in such case it shall first appoint a
successor independent qualified public accountant to perform such examinations
and render such opinions.
<PAGE>
ARTICLE 8
BENEFIT ELECTION AND
BENEFICIARY DESIGNATION PROCEDURES
8.1 ELECTIONS AS TO FORM OF DISTRIBUTION
(A) The Participant's election of an optional form of distribution
under Section 9.2 shall be made on the prescribed form and filed with the
Administrator. Such election may be made only during an election period
consisting of the 90 consecutive days ending on the Participant's Annuity
Starting Date. A Participant may revoke any election of an optional form of
distribution (without the consent of the Administrator) at any time prior to the
end of such election period. If the Participant, having revoked a prior
election, does not make another election within such election period, then his
or her Account Balance shall be distributed in the form specified in
Section 9.1.
(B) Any election involving a waiver of the Qualified Joint and
Survivor Annuity form of benefit shall not take effect unless the Participant's
Spouse consents in writing to the election during such election period. The
Spouse's consent shall (i) acknowledge the effect of the Participant's election,
(ii) designate a form of benefits or a Beneficiary which may not be changed
without spousal consent (or the consent of the Spouse must expressly permit
designations by the Participant without further requirement of consent by the
Spouse), and (iii) shall be witnessed by a notary public or, if permitted by the
Company, by a representative of the Plan. Any consent under this Section shall
be valid only with respect to the Spouse who signs the consent. An election
made by a Participant and consented to by the Spouse may be revoked by the
Participant, in writing, without the consent of the Spouse, anytime prior to the
Participant's Annuity Starting Date. Any new election must comply with the
requirements of this Section.
The Spouse's consent shall not be required if the Participant
(a) establishes to the Company's satisfaction that the Spouse's consent cannot
be obtained because the Spouse cannot be located or because of other reasons
deemed acceptable under applicable regulations and (b) agrees in writing that if
the Company is compelled by a court of competent jurisdiction or other authority
to pay all or any portion of the Participant's Account Balance to or on behalf
of such Spouse, the Participant will indemnify the Company by paying to the
Company, upon written demand, an amount equal to such payment, together with
reasonable attorneys' fees and expenses.
8.2 INFORMATION ON FORM OF DISTRIBUTION
(A) NOTICE OF DISTRIBUTION. The Administrator shall provide each
Participant eligible to receive benefits under the Plan a general notice of
distribution no less than thirty (30) and no more than ninety (90) days before
the Participant's Annuity Starting Date. The notice must be in writing and
contain an explanation of the eligibility requirements for, the material
features of, and sufficient additional information to explain the relative
values of, the optional forms of benefit available under the Plan. If the
Participant is married at the time he receives the general notice, the notice
shall also include a description in non-technical language of the Qualified
Joint and Survivor Annuity, the circumstances in which it will be provided
unless a contrary election is made, the availability of an election not to
receive benefits in the form of the Qualified Joint and Survivor Annuity, the
ability to revoke the election and the financial effect of an election (or
revocation of an election) not to receive benefits in the form of the Joint and
Survivor Annuity and the rights of the Participant's Spouse with respect to the
Joint and Survivor Annuity.
(B) ELECTION OF OPTIONAL BENEFIT FORM. Upon receipt of the general
notice of distribution, a Participant may elect to receive his benefits in an
optional form. The election shall be made only during an election period
consisting of the 90 consecutive days ending on the Participant's Annuity
Starting Date, or, if the Participant makes a timely request for additional
information, at least sixty (60) days following the date such specific
information is furnished to the Participant. Benefit payments shall be delayed
if necessary to provide the full election period. Any election made under this
paragraph may be revoked in writing during the election period, and after the
election has been revoked, another election may be made during the election
period.
8.3 DESIGNATION OF BENEFICIARY FOR DEATH BENEFIT
(A) Each Participant may, at or after the time he becomes a
Participant, designate one or more persons as a Beneficiary upon death. If more
than one Beneficiary is named, the Participant may specify the sequence and/or
proportion in which payments shall be made to each Beneficiary. The designation
shall be made on the form and in a manner prescribed by the Administrator and
shall become effective when filed with the Administrator. A Participant may,
from time to time, change his Beneficiary by filing a new designation form with
the Administrator. Any designation or change in designation shall be effective
only if the Participant designates his current Spouse as the Beneficiary, or, if
the Participant designates someone other than the Spouse, such Spouse consents
in writing to the designation in a manner consistent with the spousal consent
rules described in Section 8.1. Prior to the death of the Participant, no
designated Beneficiary shall acquire any interest in any Participant's Account
Balance and no designation shall be effective unless the Administrator receives
such designation before the Participant's death.
(B) Should the Participant designate a person other than (or in
addition to) his Spouse as Beneficiary and not obtain the Spouse's consent to
such designation, then any benefits payable under the Plan upon the
Participant's death shall be paid to the Surviving Spouse unless the Surviving
Spouse then consents to such other or additional designation in a manner
consistent with Section 8.1.
(C) Should the Participant die without having any effectively-
designated surviving Beneficiary and if there is no surviving Spouse, then the
Beneficiary shall be the Participant's then living children, if any, in equal
shares. If the Participant has neither Spouse nor children living at the time
payment is to be made, then the estate of the Participant shall be the
Beneficiary.
<PAGE>
(D) If there is doubt as to the right of any Beneficiary to receive
any amount, the Trustee, on instructions of the Administrator, may retain such
amount until the rights thereto are determined, or it may pay such amount into
any court of appropriate jurisdiction, in either of which events neither the
Plan, Employer, Administrator or Trustee shall be under any other liability to
any person in respect of such amount.
(E) The death of any individual Beneficiary prior to the death of the
Participant shall void the designation as to such Beneficiary, but in the event
of the death of any Beneficiary, subsequent to the death of the Participant, the
right to receive amounts included in the designation shall (unless the
Participant shall otherwise have instructed the Administrator in writing) pass
under such Beneficiary's will, or by the laws of descent and distribution
applicable to such Beneficiary.
(F) The marriage of a Participant shall void the designation of a
Benefi- ciary, and any death benefits shall be subject to distribution in
accordance with the provisions of Section 9.6. If the Participant shall again
become an unmarried Participant, through divorce or death of a Spouse, the
Participant shall again be entitled to make a Beneficiary designation pursuant
to this Section.
8.4 INFORMATION ON DEATH BENEFITS
The Administrator shall provide to each Married Participant a written
expla- nation of the Qualified Pre-Retirement Survivor Annuity described in
Section 9.6 comparable to the information on distribution options described in
Section 8.2. Such explanation shall be provided within whichever of the
following periods ends last:
(A) The three-year period beginning with the first day of the Plan
Year in which the Participant attains age 32;
(B) The three-year period beginning with the first day of the first
Plan Year for which the individual is a Participant; or
(C) In the case of a Participant who ceases to be an Employee before
attaining age 35, the two-year period beginning one year before the Participant
ceases to be an Employee and ending one year after the Participant ceases to be
an Employee provided, however, that if the individual again becomes an Employee,
the explanation shall be provided in accordance with subsection (A) or (B),
above.
<PAGE>
ARTICLE 9
DISTRIBUTION OF BENEFITS
9.1 TIME OF DISTRIBUTION: GENERAL RULE
Subject to Sections 9.2 and 9.3, a Participant's vested Account
Balance shall be distributed to him or her on or about the date that he or she
has elected. Within the 60-day period commencing 90 days before the Annuity
Starting Date, the Company shall provide to each Participant the written
explanation of his or her distribution options (including his or her right to
defer receipt of the distribution) described in Article 8. The distribution
election shall be made in writing on the prescribed form, which shall be signed
by the Participant and filed with the Company after he or she has received such
explanation. Where applicable, the distribution election form shall include the
written consent of the Participant to the distribution of his or her Plan
Benefit before he or she attains age 65.
9.2 EARLIEST TIME OF DISTRIBUTION
Except as required by Section 9.3, a Participant's vested Account
Balance shall not be distributed to him or her prior to the later of:
(A) The date when the Participant ceases to be an Employee; or
(B) The date when the Company receives a completed distribution
election form (as described in Section 9.1).
9.3 LATEST TIME OF DISTRIBUTION
If a Participant's Severance From Service Date occurs prior to his
Normal Retirement Date, he may elect to receive his vested Account Balance at
any time following his Severance From Service Date but no later than sixty days
following his attainment of the Normal Retirement Age under the Plan. If an
Employee continues to provides services for an Employer beyond Normal Retirement
Age, he may elect to defer the receipt of his vested Account Balance beyond his
Normal Retirement Date, but in no event shall such a Participant's vested
Account Balance be distributed to him or her after the April 1 next following
the close of the calendar year in which the Participant attains age 70 (whether
or not the Participant ceased to be an Employee). If a Participant's vested
Account Balance is (or at the time of any prior distribution was) greater than
$3,500, but such Participant (and the Spouse if the Participant is a Married
Participant) fails to consent to a distribution, the Participant's Account
Balance shall be retained in the Plan until distributed pursuant to this Article
no later than sixty (60) days following the Participant's attainment of his
Normal Retirement Age under the Plan. If the Participant fails to file a timely
distribution election form, Article 15.5 (relating to unlocated Plan
Participants) may apply.
9.4 NORMAL FORM OF BENEFIT
Subject to Article 8 and Section 9.4, and unless a Participant has
elected an alternate method of distribution pursuant to Section 9.2,
distributions of a Participant's vested Account Balance shall be made in the
form of an annuity to be purchased from an insurance company in accordance with
specifications contained in the Participant's retirement or distribution
request. In the case of a Married Participant the annuity shall be in the form
of a fifty percent (50%) Qualified Joint and Survivor Annuity. The amount used
to purchase such annuity shall be the Participant's vested Account Balance as of
the most recent practicable Valuation Date preceding his Annuity Starting Date.
9.5 OPTIONAL FORMS OF BENEFIT
In lieu of the method of payment described in Section 9.1, a
Participant may (subject to the election procedures described in Article 8)
elect, by written notice delivered to the Administrator and signed by the
Participant prior to the date on which benefit payments would commence, to have
his vested Account Balance distributed in one of the optional forms described in
this Section.
(A) Lump Sum Option: The Participant's vested Account Balance shall
be determined as of the most recent practicable Valuation Date preceding the
date the Participant's distribution is to be made in the form of a single lump
sum in cash.
<PAGE>
(B) Installment Option: The Participant's vested Account Balance
shall be distributed to the Participant in cash payments in quarterly,
semiannual or annual installments of substantially nonincreasing designated
amounts over a period of years certain.
If a Participant elects the installment option, during the
installment period, the remaining Account Balance shall be credited with a share
of gains, losses, income and expenses of the Trust Fund in accordance with
Articles 6 and 7, and the investment election procedure described in Section 6.3
shall remain available to Participants receiving installment distributions.
9.6 QUALIFIED PRE-RETIREMENT SURVIVOR ANNUITY
If a Participant dies prior to the commencement of payment of benefits
under the Plan, the Surviving Spouse shall receive a survivor annuity for the
life of the Surviving Spouse that can be purchased with the Participant's
Account Balance unless the Participant waives the Qualified Pre-Retirement
Survivor Annuity, with spousal consent. The Surviving Spouse may elect to
receive a single lump sum payment equal to the Participant's Account Balance in
lieu of the survivor annuity. A Participant may waive the Qualified Pre-
Retirement Survivor Annuity with spousal consent on or after the first day of
the Plan Year in which the Participant attains age 35. A Participant may waive
the Qualified Pre-Retirement Survivor Annuity prior to age 35, with spousal
consent, provided that the Participant has received the information set forth in
Section 8.4 prior to his waiver, and provided further that such waiver shall
become invalid upon the beginning of the Plan Year in which the Participant's
35th birthday occurs. If there is no new waiver after such date, the
Participant's Surviving Spouse must receive the Qualified Pre-Retirement
Survivor Annuity upon the Participant's death.
Any Qualified Pre-Retirement Survivor Annuity payable hereunder shall
be provided by purchasing an annuity from a duly licensed insurance company.
Upon purchase of such annuity in accordance with the terms of the Plan and
transfer to the Participant or his Surviving Spouse, the Plan and the Trust Fund
shall be discharged of all liability for benefits payable under the Plan, and
the Participant and/or Surviving Spouse shall look solely to the insurance
company for the payment of benefits.
Except as provided in Section 9.7, the distribution of a Participant's
vested Account Balance to his or her Surviving Spouse pursuant to this Section
9.6 may be made prior to the date that the Participant attained or would have
attained his or her Normal Retirement Age only if such Surviving Spouse consents
to such distribution in writing not more than 90 days before the Annuity
Starting Date.
9.7 SMALL BENEFITS: IMMEDIATE LUMP SUM
If a Participant's vested Account Balance (determined as of the
Valuation Date coincident with or next following the date of termination of
employment) is not greater than $3,500, and such vested Account Balance was not
greater than $3,500 at the time of any prior distribution, then it will be paid
to the Participant in a single lump sum in cash as soon as administratively
practicable. In the event that a Participant who receives a distribution
pursuant to this subsection, which is less than one hundred percent (100%) of
the value of his Account Balance again becomes an Employee prior to incurring
five (5) consecutive One-Year Periods of Severance, as described in Section
10.3, any forfeited amount shall be restored, as provided in Section 10.3.
9.8 INVESTMENT OF ACCOUNT BALANCE OF TERMINATED PARTICIPANT
In the event a Participant's employment with the Employer is
terminated and the Participant elects to leave his Account Balance in the Plan,
such Account Balance shall continue to be invested pursuant to the provisions of
the Plan. In the event any investment alternative ceases to be offered as an
investment alternative under the Plan, the portion of the Participant's Account
Balance invested in such discontinued investment fund shall be liquidated and
reinvested in a money market fund or such other offered fund which shall provide
the most safety for purposes of the protection of principal.
9.9 REQUIRED DISTRIBUTIONS
In the event that a Participant dies after distribution of his or her
Plan benefit has begun, then his or her remaining benefit shall be distributed
at least as rapidly as under the distribution method in use at his or her death.
In the event that a Participant dies before any distribution of his or her Plan
benefit has begun, then distribution of any death benefit under the Plan must be
made (A) to a Beneficiary who is not the Participant's Surviving Spouse, over
the Beneficiary's life or life expectancy, beginning not later than one year
after the Participant's death; (B) to the Participant's Surviving Spouse, over
the Surviving Spouse's life or life expectancy, beginning not later than the
later of one year after the Participant's death or the date that the
Participant attained or would have attained age 70; or (C) in all other cases,
within five years after the Participant's death. All distributions under the
Plan shall be made in accordance with the Income Tax Regulations under Section
401(a)(9) of the Code, including Income Tax Regulations Section 1.401(a)(9)-2 or
its successor. Such regulations are incorporated in the Plan by reference and
shall override any inconsistent provisions of the Plan.
<PAGE>
9.10 DIRECT ROLLOVERS
(i) THE DIRECT ROLLOVER OPTION. Notwithstanding any provision of the
Plan to the contrary that would otherwise limit a Distributee's election under
this Section 9.10, effective January 1, 1993, a Distributee may elect, at the
time and in the manner prescribed by the Administrator, to have any portion of
an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan
specified by the Distributee in a Direct Rollover.
(ii) DEFINITION OF ELIGIBLE ROLLOVER DISTRIBUTION. An Eligible
Rollover Distribution is any distribution of all or any portion of the balance
to the credit of the Distributee, except that an Eligible Rollover Distribution
does not include: any distribution that is one of a series of substantially
equal periodic payments (not less frequently than annually) made for the life
(or life expectancy) of the Distributee or the joint lives (or joint life
expectancies) of the Distributee and the Distributee's designated beneficiary,
or for a specified period of 10 years or more; any distribution to the extent
such distribution is required under Section 401(a)(9) of the Code; and the
portion of any distribution that is not includable in gross income (determined
without regard to the exclusion for net unrealized appreciation with respect to
employer securities).
(iii) DEFINITION OF ELIGIBLE RETIREMENT PLAN. An Eligible
Retirement Plan is an individual retirement account described in Section 408(a)
of the Code, an individual retirement annuity described in Section 408(b) of the
Code, an annuity plan described in Section 403(a) of the Code, or a qualified
trust described in Section 401(a) of the Code, that accepts the Distributee's
Eligible Rollover Distribution. However, in the case of an Eligible Rollover
Distribution to the surviving spouse, an Eligible Retirement Plan is an
individual retirement account or individual retirement annuity.
(iv) DEFINITION OF DISTRIBUTEE. A Distributee includes an Employee
or former Employee. In addition, the Employee's or former Employee's surviving
spouse or former spouse who is the Alternate Payee under a QDRO are Distributees
with regard to the interest of the spouse or former spouse.
(v) DEFINITION OF DIRECT ROLLOVER. A Direct Rollover is a payment by
the Plan to the Eligible Retirement Plan specified by the Distributee.
<PAGE>
ARTICLE 10
VESTING, RETIREMENT, AND
TERMINATION OF EMPLOYMENT
10.1 VESTING IN DEFERRED SALARY, AFTER-TAX AND ROLLOVER CONTRIBUTIONS
A Participant shall at all times have a one hundred percent (100%)
vested and nonforfeitable interest in the value of his Deferred Salary Account,
After-Tax Contributions Account and Rollover Account, if any.
10.2 VESTING IN EMPLOYER ACCOUNT
(A) A Participant shall at all times have a one hundred percent
(100%) vested and nonforfeitable interest in the value of his Employer
Contributions (and earnings thereon) made prior to the Effective Date.
(B) A Participant shall have a one hundred percent (100%) vested and
nonforfeitable interest in the value of all funds credited to his Employer
Account at his Normal Retirement Age or if the Participant's employment is
terminated due to death, becoming Disabled or retirement on a Normal, Early or
Postponed Retirement Date.
(C) A Participant whose employment is terminated prior to his
Retirement Date (and for any reason other than death, becoming Disabled or
termination on an Early, Normal or Postponed Retirement Date) shall have a
vested and nonforfeitable right to any Employer Contributions (and earnings
thereon) in his Employer Account in accordance with the following schedule:
YEARS OF SERVICE PERCENTAGE VESTED
---------------- -----------------
less than 1 0%
1 but less than 2 33-1/3%
2 but less than 3 66-2/3%
3 or more 100%
For all new Participants of the Plan whose employment commences
on or after January 1, 1995, a Participant shall have a vested and
nonforfeitable right to any Employer Contributions (and earnings thereon) in his
Employer Account in accordance with the following schedule:
YEARS OF SERVICE PERCENTAGE VESTED
---------------- -----------------
less than 1 0%
1 but less than 2 20%
2 but less than 3 40%
3 but less than 4 60%
4 but less than 5 80%
5 or more 100%
10.3 VESTING AFTER PRIOR DISTRIBUTIONS
Section 10.2 shall be applied as set forth in this Section 10.3 in the
case of any Participant who received one or more prior withdrawals or
distributions from his Employer Account, who thereafter has not incurred five
(5) consecutive One-Year Periods of Severance and who is not yet 100% vested in
the Employer Account. The vested portion of such Participant's Employer Account
shall be determined in two steps. First, the Participant's vested percentage
under Section 10.2 shall be applied to the sum of (a) the value of the Employer
Account plus (b) the aggregate amount of the Participant's prior withdrawals or
distributions from such Account. Then, the aggregate amount of the
Participant's prior withdrawals or distributions from such Account shall be
subtracted.
<PAGE>
10.4 FORFEITURES
(A) If a Participant's employment is terminated, any portion of his
Account Balance in which the Participant does not have a nonforfeitable interest
shall be provisionally forfeited as of his Severance From Service Date.
(B) If a Participant who has had a provisional forfeiture shall again
become an Employee prior to incurring five (5) consecutive One-Year Periods of
Severance, the Employer shall reinstate (as of the Participant's Reemployment
Commencement Date) the dollar amount of his Account Balance forfeited,
unadjusted for any gains or losses which occurred during said Periods of
Severance. If such Participant received a distribution upon termination,
reinstatement of the prior forfeited amount will be provided automatically
without requiring repayment of the amount of any prior distribution.
Thereafter, Section 10.3 may be applicable to the determination of the vested
portion of the Participant's Employer Account.
(C) If the Participant is not rehired before incurring five (5)
consecutive One-Year Periods of Severance, the amount of his provisional
forfeiture shall be forfeited permanently.
(D) Any provisional forfeitures resulting from the operation of this
Section shall be held until the last business day of the Plan Year and shall be
used first to reinstate prior forfeitures pursuant to paragraph (B). Any
amounts remaining after such reinstatement shall be used, as of the last
business day of the Plan Year, to reduce Employer Contributions which are due or
may become due under the Plan. To the extent the available forfeitures are
insufficient to fully reinstate Participants' previously nonvested amounts, the
Employer will make an additional contribution to the Plan sufficient to fully
reinstate such amounts.
<PAGE>
ARTICLE 11
WITHDRAWALS
11.1 HARDSHIP WITHDRAWALS
(A) The Administrator shall direct the Trustee to make a distribution
to a Participant in accordance with this Section in the event of a Participant's
Hardship and request for withdrawal. For purposes of this Section, a
distribution will be on account of Hardship only if the distribution:
(1) Is made on account of an immediate and heavy financial need
of the Participant; and
(2) Is necessary to satisfy such immediate and heavy financial
need and does not exceed the amount required to relieve such need and is not
reasonably available from other resources of the Participant.
(B) Immediate and heavy financial needs recognized by the Plan shall
include and be limited to:
(1) Medical expenses (as described in Section 213(d) of the
Code) incurred by the Participant, the Participant's Spouse or any dependent of
the Participant (as defined in Section 152 of the Code);
(2) Purchase (excluding mortgage payments) of a principal
residence for the Participant;
(3) Payment of tuition and related educational fees for the next
12 months of post-secondary education for the Participant or the Participant's
Spouse, children or dependents;
(4) The need to prevent eviction of the Participant from his
principal residence or foreclosure on the mortgage of the Participant's
principal residence; or
(5) 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 and other documents of general applicability.
(C) A distribution will be deemed necessary to satisfy the immediate
and heavy financial need of the Participant if:
(1) The distribution is not in excess of the amount of the
immediate and heavy financial need;
(2) The Participant has obtained all distributions, other than
hardship distributions, and all nontaxable loans currently available under all
plans maintained by the Employer;
(3) The Plan, and all other plans maintained by the Employer,
other than health care plans, provide that the Participant's elective
contributions and employee contributions, if any, will be suspended for at least
12 months after receipt of the hardship distribution; and
(4) The Plan, and all other plans maintained by the Employer,
provide that the Participant may not make elective contributions for the
Participant's taxable year immediately following the taxable year of the
hardship distribution in excess of the applicable limit under Section 402(g) of
the Code for such next taxable year less the amount of such Participant's
elective contributions for the taxable year of the Hardship distribution.
<PAGE>
(D) The Administrator may require the submission of such evidence as
it may reasonably deem necessary to confirm the existence of such a Hardship.
In the case of a married Participant, a requested Hardship withdrawal shall not
be paid unless the Participant's Spouse has consented in writing to the payment
of such withdrawal in the form of a lump sum (instead of a Qualified Joint and
Survivor Annuity). The Spouse's consent shall be given within the 90-day period
preceding payment of the withdrawal. A request for distribution pursuant to
this Section shall be approved or denied by written instrument given by the
Administrator to the Participant at his address as provided to the
Administrator, within sixty (60) days after the date the written request,
complete with all evidence with respect thereto requested by the Administrator,
is given to the Administrator by the Participant. In the event that such
request is approved, the distribution shall be made within thirty (30) days
after notice of approval is given by the Administrator to the Participant from
such portions of the Participant's Account as he shall designate; provided,
however, that under no circumstances may Employer Contributions and earnings
thereon, or earnings on the Participant's Deferred Salary Contributions, be
distributed pursuant to this Section.
11.2 WITHDRAWAL OF AFTER-TAX CONTRIBUTIONS
Upon written request to the Plan Administrator, a Participant may
withdraw all or any part of the amount credited to his After-Tax Contributions
Account, provided, however, that the Participant may make such withdrawal only
once each Plan Year. All such withdrawals shall be made within sixty (60) days
of the receipt of the Participant's written request by the Administrator, or as
soon thereafter as practicable.
11.3 LOANS TO PARTICIPANTS
11.3.1 AMOUNT OF LOANS. With the Company's prior written consent,
a Participant who is an Employee (or who otherwise is a 'party in interest' as
defined in Section 3(14) of ERISA) may obtain a cash loan from the Participant's
Accounts. The minimum amount of the loan shall be $1,000. Subject to Section
11.3.2, the maximum amount of the loan shall be 50% of the value of the vested
portion of the Participant's Accounts.
11.3.2 AGGREGATE LOAN LIMITATION. No loan shall be granted under
the Plan if it would cause the aggregate balance of all loans which a
Participant thereafter has outstanding under this Plan or under any other
qualified plan maintained by any member of the Affiliated Group to exceed
$50,000, less the amount by which such aggregate balance has been reduced
through repayments during the period of 12 consecutive months ending on the day
before a new loan is made.
11.3.3 TERMS OF LOANS. A loan to a Participant shall be made on
such terms and conditions as the Company may determine, provided that the loan
shall:
(a) Be evidenced by a promissory note signed by the Participant
and secured by no more than 50% of the value of the vested portion of all of his
or her Accounts (regardless of the amount of the loan or the source of the loan
funds);
(b) Bear interest at a fixed rate equal to the prime interest
rate in effect at the New York main office of Citibank, N.A., plus 1% on the
last business day of the month immediately preceding the date on which the
Company receives the prescribed loan request form;
(c) Provide for declining balance amortization over its term
with payments at quarterly or more frequent intervals, as determined by the
Company;
(d) Provide for loan payments of not less than $10 per payment;
(e) Provide for loan payments (i) to be withheld whenever
possible through periodic payroll deductions from the Participant's compensation
from the Company or (ii) to be paid by check or money order whenever payroll
withholding is not possible;
<PAGE>
(f) Provide for repayment in full on or before the earlier of
(i) the date when the Participant ceases to be an Employee or (ii) the date five
years after the loan is made (or the date 15 years after the loan is made if the
loan is used to acquire a dwelling which, within a reasonable period of time, is
to be used as the principal residence of the Participant); and
(g) Provide that a Participant's Accounts shall not be applied
to the satisfaction of the Participant's loan obligations before the Accounts
become distributable under Article 9, unless the Company determines that the
loan obligations are in default and takes such actions as the Company deems
necessary or appropriate to cause the Plan to realize on its security for the
loan. Such actions may include (without limitation) an involuntary withdrawal
from the Participant's vested Accounts, whether or not the withdrawal would be
permitted under Section 11.5 on a voluntary basis; provided that an involuntary
withdrawal from vested Company contributions paid within the most recent 24
months or from Deferred Salary Accounts shall be made only to the extent that
the requirements of Section 11.5 are met. The Company may take such action as
it deems necessary to recover the balance of a loan secured by such Company
contributions or by Deferred Salary Accounts. If an involuntary withdrawal from
Deferred Salary Accounts or Employer Account occurs, the Participant shall be
subject to the consequences described in Article 9. If any involuntary
withdrawal occurs, the Participant shall not be permitted to obtain a new loan
under the Plan for a period of 12 months, commencing as of the last day of the
payroll period in which the involuntary withdrawal occurs. The consent of the
Participant's Spouse shall not be required at the time of any action taken by
the Company under this Section 11.3.3(g).
11.3.4 COMPANY CONSENT. The Company, based on the borrower's
creditworthiness and the criteria set forth in this Section 11.3, may withhold
its consent to any loan or may consent only to the borrowing of a part of the
amount requested by the Participant. The Company shall act upon requests for
loans in a uniform and nondiscriminatory manner, consistent with the
requirements of Section 401(a), Section 401(k) and related provisions of the
Code and Section 408(b)(1) of ERISA and the regulations thereunder.
11.3.5 RESTRICTIONS ON LOANS. No Participant shall have more than
one loan under this Section 11.3 outstanding at the same time. A Participant
shall not be permitted to obtain more than one loan under this Section 11.3 in
any period of 12 consecutive months. A married Participant shall not be
permitted to obtain any loan under this Section 11.3 unless his or her Spouse
has consented in writing to the assignment of his or her Accounts as security
and to any actions that the Company subsequently may take under Section
11.3.3(g), except to the extent the portion of the Participant's Accounts used
as security for the loan does not exceed $3,500.
11.3.6 DISBURSEMENT AND SOURCE OF LOANS. A Participant may request
a loan by filing a request with the Company in accordance with procedures
established by the Company. A loan shall be disbursed as soon as reasonably
practicable after the date on which the Company receives the loan request
(subject to the Company's consent). For purposes of this Section 11.3, the
value and vested percentage of a Participant's Accounts shall be determined on
the last business day of the quarter immediately preceding the date when the
Trustee effects the loan transaction or such other more current valuation date
that the Company may determine. If a Participant requests and is granted a
loan, the amount of the loan shall be transferred from the Participant's
Accounts. If more than one Account is available to make a transfer, the
transfer shall be made proportionately from each Account, subject to such other
ordering rules as the Company may adopt. The promissory note executed by the
Participant shall be held by the Trustee or its agent as part of the Trust Fund.
11.3.7 LOAN PAYMENTS AND DEFAULTS. Principal and interest payments
on a Participant's loan shall be credited as soon as reasonably practicable to
the Participant's Accounts proportionately, subject to the ordering rules, if
any, adopted by the Company. Any loss caused by nonpayment or other default on
a Participant's loan obligations shall be borne solely by that Participant's
Accounts.
11.3.8 LOAN FEES. A Participant who obtains a loan under this
Section 11.3 shall be required to pay such fees as the Trustee or its agent may
impose in order to defray the cost of administering loans from the Plan.
<PAGE>
ARTICLE 12
DISTRIBUTION OF EXCESS DEFERRALS, EXCESS CONTRIBUTIONS
AND EXCESS AGGREGATE CONTRIBUTIONS
12.1 DISTRIBUTION OF EXCESS CONTRIBUTIONS
(A) Notwithstanding any other provision of the Plan, Excess
Contributions (as hereinafter defined) and income allocable thereto, including
income for periods after the close of the Plan Year to which the Excess
Contributions applies, if appropriate, shall be distributed as soon as
administratively possible, but in no event later than the last day of each Plan
Year, to Participants on whose behalf such Excess Contributions were made for
the preceding Plan Year.
(B) For purposes of this Section, 'Excess Contributions' for any Plan
Year means the aggregate amount of Deferred Salary Contributions of Highly
Compensated Employees for any Plan Year (not including any such Deferred Salary
Contributions that exceed the $9,240 limit of Section 402(g)(3) of the Code and
are distributed to Participants for the calendar year ending with such Plan Year
pursuant to Section 4.1(C)) that exceeds the limitations described in Section
4.4.
(C) The amount of such Excess Contributions distributable to Highly
Compensated Employees shall be determined by reducing the Actual Deferral
Percentage of the Highly Compensated Employee with the highest Actual Deferral
Percentage to the extent required to
(1) Enable the cash or deferred arrangement to satisfy the
deferral percentage test limitation described in Section 4.4; or
(2) Cause such Highly Compensated Employee's Actual Deferral
Percentage to equal the Actual Deferral Percentage of the Highly Compensated
Employee with the next highest Actual Deferral Percentage.
This process must be repeated until the cash or deferred
arrangement satisfies one of the deferral percentage tests described in
Section 4.4.
Any Excess Contributions of any of the 10 most highly compensated
Highly Compensated Employees and any five percent (5%) owner affected by the
family aggregation rules described in the definition of the term 'Highly
Compensated Employee' in Section 2.35 above shall be allocated among the
individuals in each family aggregation group in proportion to the Deferred
Salary Contributions taken into account under Section 4.4 for each such
individual.
Any Excess Aggregate Contributions of any of the 10 most highly
compensated Highly Compensated Employees and any five percent (5%) owner
affected by the family aggregation rules described in the definition of the term
'Highly Compensated Employee' in Section 2.35 above shall be allocated among the
individuals in each family aggregation group in proportion to the After-Tax
Contributions and Employer Matching Contributions taken into account under
Section 5.3 for each such individual.
(D) The income allocable to Excess Contributions shall be determined
by multiplying income allocable to the Participant's Deferred Salary
Contributions and Employer Contributions for the Plan Year by a fraction, the
numerator of which is the Excess Contribution on behalf of the Participant for
the preceding Plan Year and the denominator of which is the sum of the
Participant's account balances attributable to Deferred Salary Contributions and
Employer Contributions on the last day of the preceding Plan Year.
Income allocable to Excess Contributions for the Plan Year and
for the "gap period" between the end of the Plan Year and the date of
distribution shall be determined pursuant to Proposed Regulation Section
1.401(k)-1(f)(4).
(E) The Excess Contributions which would otherwise be distributed to
the Participant shall be adjusted for income in accordance with regulations and
other official pronouncements from the Secretary of the Treasury.
(F) Amounts distributed pursuant to this Section shall first be
treated as distributions from the Participant's Deferred Salary Account and
shall be treated as distributed from the Participant's Employer Contributions
only to the extent such Excess Contributions exceed the balance in the
Participant's Deferred Salary Account.
<PAGE>
12.2 DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS
(A) Excess Aggregate Contributions and income allocable thereto shall
be forfeited, pursuant to this Section, if otherwise forfeitable under the terms
of this Plan, or if not forfeitable, distributed no later than the last day of
each Plan Year to Participants who made After-Tax Contributions for the
preceding Plan Year or who received an Employer Matching Contribution for the
preceding Plan Year.
(B) For purposes of this Section, 'Excess Aggregate Contributions'
shall mean the amount described in Section 401(m)(6)(B) of the Code.
(C) The Employer shall rank its Highly Compensated Employees by
Contribution Percentage in descending order. The Employer shall then reduce the
amount of Employer Matching Contributions and After-Tax Contributions taken into
account in computing the Contribution Percentage which were made on the behalf
of the Highly Compensated Employee with the Highest Contribution Percentage
until the following occurs:
(1) The Plan satisfies the limitations set forth in Section 5.3;
or
(2) The Contribution Percentage for such Highly Compensated
Employee is reduced to a percentage which equals the Contribution Percentage of
the Highly Compensated Employee with the next highest Contribution Percentage.
In applying the reduction mechanism set forth in this Section,
the After-Tax Contributions made by a Highly Compensated Employee shall be
reduced before the Employer Matching Contributions made on behalf of such Highly
Compensated Employee are reduced.
(D) The income allocable to Excess Aggregate Contributions shall be
determined by multiplying the income allocable to the Employer Matching
Contributions and After-Tax Contributions for the Plan Year by a fraction, the
numerator of which is the Excess Aggregate Contributions made on behalf of the
Participant for the preceding Plan Year and the denominator of which is the sum
of the Participant's account balance attributable to Employer Matching
Contributions and After-Tax Contributions.
Income allocable to Excess Aggregate Contributions for the Plan
Year and for the "gap period" between the end of the Plan Year and the date of
distribution (or forfeiture) shall be determined pursuant to Proposed
Regulations Section 1.401(m)-1(e)(3).
(E) The Excess Aggregate Contributions to be distributed to a
Participant shall be adjusted for income, and, if there is a loss allocable to
the Excess Aggregate Contributions, shall in no event be less than the lesser of
the Participant's Account Balance under the Plan or the Participant's Employer
Matching Contributions and After-Tax Contributions for the Plan Year.
(F) Excess Aggregate Contributions shall be distributed from the
Participant's After-Tax Contributions Account and forfeited, if otherwise
forfeitable under the terms of the Plan (or, if not forfeitable, distributed),
from the Participant's Matching Contribution Account in proportion to the
Participant's Matching Contributions for the Plan Year.
(G) Amounts forfeited by Highly Compensated Employees under this
Section shall be:
(1) Treated as Annual Additions under Sections 5.6 and 5.7 of
the Plan; and
(2) Allocated, after all other forfeitures under the Plan, to
the same Participants and in the same manner as such other forfeitures of
Employer Matching Contributions are allocated to Participants under the Plan;
provided, however, that no such forfeitures arising under this Section shall be
allocated to the account of any Highly Compensated Employee.
<PAGE>
ARTICLE 13
ADMINISTRATION OF THE PLAN
13.1 PLAN ADMINISTRATOR
Except as to those functions reserved within the Plan to the Board of
Directors, there shall be an individual administrator or an administrative
committee (hereafter referred to as the Administrator) appointed by the Board of
Directors to control and manage the operation and administration of the Plan.
The Administrator shall be considered the "named fiduciary" and the "plan
administrator" for purposes of ERISA and the Code. The Board of Directors shall
have the authority to allocate or delegate among themselves, to the
Administrator, or to any other person, any fiduciary responsibility with respect
to the Plan.
13.2 SELECTION OF COMMITTEE
If the Board of Directors appoints a committee to be the
Administrator, then such committee shall consist of not fewer than three nor
more than seven members to serve at its pleasure and without compensation for
service as such. The committee shall select a secretary (who may, but need not,
be a member of the committee) to keep its records or to assist it in the doing
of any act or thing to be done or performed by the committee.
A majority of the members of the committee at the time in office shall
constitute a quorum for the transaction of the business at any meeting. Any
determination or action of the committee may be made or taken by a majority of
the members present at any meeting thereof, or without a meeting by a resolution
or written memorandum concurred in by a majority of the members then in office.
No member who is a Participant of this Plan, however, shall vote on any question
relating solely to himself.
13.3 POWERS OF THE ADMINISTRATOR
The Administrator, subject to the limitations herein contained and to
such other restrictions as the Board of Directors may make, shall have the
discretionary power and the duty to take all action and to make all decisions
necessary or proper to carry out the provisions of Plan. The determination of
the Administrator as to any question involving the general administration and
interpretation of the Plan shall be final, conclusive and binding. Any
discretionary actions to be taken under the Plan by the Administrator with
respect to the classification of Employees, Participants, beneficiaries,
contributions, or benefits shall be uniform in their nature and applicable to
all persons similarly situated. Without limiting the generality of the
foregoing, the Administrator shall have the following powers and duties:
(A) To require any person to furnish such information as it may
request for the purpose of the proper administration of the Plan as a condition
of receiving any benefits under the Plan;
(B) To make and enforce such rules and regulations and prescribe the
use of such forms as it shall deem necessary for the efficient administration of
the Plan;
(C) To interpret the Plan, and to resolve ambiguities,
inconsistencies and omissions, which findings shall be binding, final and
conclusive;
(D) To decide on questions concerning the Plan and the eligibility of
any Employee to participate in the Plan, in accordance with the provisions of
the Plan;
(E) To determine the amount of benefits which shall be payable to any
person in accordance with the provisions of the Plan. The Administrator may
require claims for benefits to be filed in writing, on such forms and containing
such information as the Board may deem necessary. Adequate notice shall be
provided in writing to any Participant or beneficiary thereof whose claim for
benefits under the Plan has been wholly or partially denied. The Plan claim
review procedure is more particularly described in Section 13.7 of the Plan.
Notice of denial of a claim shall be written in a manner calculated to be
understood by the Participant or his Beneficiary and shall afford reasonable
opportunity to the Participant or his Beneficiary whose claim for benefits has
been denied for a full and fair review of the decision denying the claim;
<PAGE>
(F) To allocate any such powers and duties to or among individual
members of any administrative committee serving as the Administrator;
(G) To designate persons other than Administrator to carry out any
duty or power which would otherwise be a fiduciary responsibility of the
Administrator, under the terms of the Plan; and
(H) To make such administrative or technical amendments to the Plan
as may be necessary or appropriate to carry out the intent of the Board of
Directors, including such amendments as may be required to satisfy the
requirements of Section 401(a) and Section 401(k) of the Code, and of ERISA and
any similar provisions or subsequent revenue or other laws, or the rules and
regulations from time to time in effect under any of such laws or to conform
with governmental regulations or other policies.
13.4 SELECTION AND REPLACEMENT OF TRUSTEE
The Board of Directors shall appoint and they shall retain the power
to discharge or replace the Trustee. However, the power to appoint, discharge
or replace the Trustee shall not confer any responsibility or authority upon the
Board of Directors with respect to the management or control of the assets of
the Plan.
13.5 SELECTION OF OTHER PROFESSIONAL COUNSELORS
(A) The Administrator may employ a counsel, a qualified public
accountant, a qualified actuary, consultant and such clerical, medical and other
accounting services as it may require in carrying out the provisions of the Plan
or in complying with requirements imposed by ERISA and the Code.
(B) The Administrator may appoint an investment manager or managers
and delegate investment responsibilities to manage any assets of the Plan,
including the power to acquire and dispose of fund assets and to perform such
other services as the Administrator shall deem necessary or desirable in
connection with the management of Plan assets. Such investment manager or
managers shall (i) be registered as an investment advisor under the Investment
Advisors Act of 1940; (ii) be a bank, as defined in the Investment Advisors Act
of 1940; or (iii) be an insurance company qualified to manage, acquire or
dispose of qualified plan assets under the laws of more than one State; and
shall acknowledge in writing to the Administrator that he is (or they are) a
fiduciary with respect to the Plan. Anything in this Article or elsewhere in
the Plan to the contrary notwithstanding, the Trustee shall be relieved of the
authority and discretion to manage and solely control the assets of the Plan to
the extent that authority to acquire, dispose of, or otherwise manage the assets
of the Plan is delegated to one or more investment managers in accordance with
this Section.
13.6 RELIANCE ON PROFESSIONAL COUNSELORS
To the extent permitted by law, the Administrator and any person to
whom it may delegate any duty or power in connection with administering the
Plan, the Employer, and the officers and directors thereof, shall be entitled to
rely conclusively upon, and shall be fully protected in any action taken or
suffered by them in good faith in reliance upon, any counsel, accountant, other
specialist, or other person selected by the Administrator, or in reliance upon
any tables, valuations, certificates, opinions or reports which shall be
furnished by any of them or by the Trustee. Further, to the extent permitted by
law, no member of the Administrator, nor the Employer, nor the officers nor
directors thereof, shall be liable for any neglect, omission or wrongdoing of
the Trustee or any other member of the Administrator.
<PAGE>
13.7 PLAN CLAIM PROCEDURE
(A) Any claim for a Plan benefit hereunder shall be filed by a
Participant or Beneficiary (claimant) of this Plan on the form prescribed for
such purpose with the Administrator, or in lieu thereof, by written
communication which is made by the claimant or the claimant's authorized
representative which is reasonably calculated to bring the claim to the
attention of the Administrator.
(B) If a claim for a Plan benefit is wholly or partially denied,
notice of the decision shall be furnished to the claimant by the Administrator
within ninety (90) days after receipt of the claim by the Administrator.
(C) Any claimant who is denied a claim for benefit shall be furnished
written notice setting forth:
(1) The specific reason or reasons for the denial;
(2) Specific reference to the pertinent Plan provisions upon
which the denial is based;
(3) 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
(4) An explanation of the Plan's claim review procedure.
(D) In order that a claimant may appeal denial of a claim, a claimant
or his duly authorized representative:
(1) May request a review by written application to the
Administrator not later than sixty (60) days after receipt by the claimant of
written notification of denial of a claim;
(2) May review pertinent documents; and
(3) May submit issues and comments in writing.
(E) A decision on review of a denied claim shall be made not later
than sixty (60) days after the Plan's receipt of a request for review, unless
special circumstances require an extension of time for processing, in which case
a decision shall be rendered within a reasonable period of time, but not later
than one hundred twenty (120) days after receipt of a request for review.
The decision on review shall be in writing and shall include the
specific reason(s) for the decision and the specific reference(s) to the
pertinent Plan provisions on which the decision is based.
13.8 SOURCE OF PAYMENT OF EXPENSES
All expenses prior to the termination of the Plan that shall arise in
connection with the administration of the Plan, including but not limited to the
compensation of the Trustee, administrative expenses and proper charges and
disbursements of the Trustee and compensation and other expenses and charges of
any counsel, accountant, specialist or other person who shall be employed by the
Administrator in connection with the administration thereof, shall be paid from
the Trust Fund to the extent not paid by the Employer.
13.9 COMPENSATION OF THE ADMINISTRATOR
The Administrator shall serve without compensation for services as
such (other than any compensation the Administrator may receive as an employee
of the Employer), but all reasonable expenses incurred in the performance of
their duties shall, to the extent not paid by the Employer, be paid from the
Trust Fund. Unless otherwise determined by the Company or unless required by
any Federal or State law, the Administrator shall not be required to give any
bond or other security in any jurisdiction.
13.10 FIDUCIARY LIABILITY INSURANCE
The Administrator may, to the extent permitted by law, procure and pay
(from assets of the Plan or the Employer) insurance premiums for fiduciary
liability insurance covering the Board of Directors, the Administrator and other
such Employees of the Employer as the Administrator shall in their discretion
determine. To the extent such insurance is not obtained and to the extent
permitted by law, the Employer shall indemnify any fiduciary described in the
preceding sentence for any loss arising out of any action in connection with the
performance (or omission) of any duty imposed by the Plan.
<PAGE>
ARTICLE 14
AMENDMENT OR TERMINATION
14.1 RIGHT TO AMEND
(A) The Board of Directors, a delegate of the Board of Directors or
an authorized officer of the Company reserves the right at any time and from
time to time and retroactively if deemed necessary or appropriate, to modify or
amend, in whole or in part, any or all of the provisions of the Plan.
(B) No such modification or amendment, however, shall make it
possible for any part of the corpus or income of the Trust Fund to be used for,
or diverted to, purposes other than for the exclusive benefit of Participants
and their beneficiaries under the Plan prior to the satisfaction of all
liabilities with respect to Participants and their Beneficiaries under the Plan,
prior to the satisfaction of all liabilities with respect thereto. Moreover, no
amendment or modification shall make it possible to deprive any Participant of a
previously accrued benefit (including an optional form of benefit), except to
the extent permitted by Section 412(c)(8) of the Code.
(C) The Administrator may adopt amendments which do not significantly
affect the cost of the Plan and which may be necessary or appropriate to qualify
or maintain the Plan, any trust and any contract with an insurance carrier which
may form a part of the Plan as a plan and trust meeting the requirements of
Sections 401(a) and 501(a) of the Code.
14.2 RIGHT TO DISCONTINUE PLAN
The Board of Directors reserves the power to discontinue the Plan at
any time with respect to any or all Employers. Unless the Plan be sooner
terminated, a successor to the business or any portion thereof of an Employer,
by whatever form or manner resulting, with the written consent of the Company,
may continue the Plan and become a party to the Trust Agreement by executing
appropriate supplemental agreements and other documents, and such successor
shall, succeed to all applicable rights, powers and duties of such Employer with
relation thereto. The employment of any Participant who is continued in the
employ of such successor shall not be deemed to have been terminated or severed
for any purpose under the Plan.
14.3 OBLIGATIONS UPON MERGER, CONSOLIDATION OR TRANSFER
In the event of any merger or consolidation with, or transfer of
assets or liabilities to, any other plan, each Participant shall be entitled to
receive a benefit if the Plan were to terminate immediately after the merger,
consolidation, or transfer, which is not less than the benefit he would have
been entitled to receive if the Plan had terminated immediately before the
merger, consolidation, or transfer.
14.4 OBLIGATIONS UPON TERMINATION, PARTIAL TERMINATION OR DISCONTINUANCE
(A) While each Employer intends to continue the Plan indefinitely,
nevertheless it assumes no contractual obligation as to the Plan's continuance,
and the Board of Directors may terminate the Plan as to any Employer. In the
case of any termination, partial termination or complete discontinuance of
contributions, each Participant who is then an Employee and who is affected by
the termination, partial termination or complete discontinuance of contributions
shall have a one hundred percent (100%) non-forfeitable interest in the Account
Balance.
(B) At the direction of the Administrator after any such
discontinuance, and after payment of, or appropriate reserve for, the expenses
of any such discontinuance each Participant's Account Balance shall be paid in
cash to each Participant, or, if he is then deceased, to his designated
beneficiary, if living, or, if such beneficiary is not living, to such deceased
Participant's estate.
(C) Notwithstanding the foregoing, a Participant's Account Balance
shall not be distributed pursuant to a termination, partial termination or
complete discontinuance of contributions if the Employer or an affiliated
Employer maintains a successor plan with respect to the Participant.
14.5 CONTINUED FUNDING AFTER PLAN TERMINATION
Anything in the Plan to the contrary notwithstanding, no Employer,
upon any termination or partial termination of the Plan, shall have any
obligation or liability whatsoever to make any further payments for the benefit
of Participants (including all or any part of any contributions payable prior to
any termination of the Plan), to the Trustee for benefits under the Plan.
Neither the Trustee, the Board of Directors, the Administrator, nor any
Participant, Employee, nor beneficiary, shall have any right to compel an
Employer to make any payment after the termination or partial termination of the
Plan.
14.6 DISTRIBUTION UPON SALE OF ASSETS
A Participant's Account Balance may be distributed to the Participant
as soon as administratively feasible after the sale of substantially all of the
assets used by the Employer in the trade or business in which the Participant is
employed if the Participant is no longer employed by the Employer or an
affiliated Employer who has adopted the Plan and the assets were not sold to a
related employer.
<PAGE>
ARTICLE 15
GENERAL PROVISIONS
15.1 NO IMPLIED EMPLOYMENT CONTRACT
This Plan shall not be deemed to constitute a contract between the
Employer and any Employee or other person whether or not in the employ of the
Employer, nor shall anything herein contained be deemed to give any Employee or
other person, whether or not in the employ of the Employer, any right to be
retained in the employ of the Employer, or to interfere with the right of the
Employer to discharge any Employee at any time and to treat him without any
regard to the effect which such treatment might have upon him as a Participant
in the Plan.
15.2 BENEFITS NOT ASSIGNABLE
Except as may otherwise be provided by law, no distribution or payment
under the Plan to any Participant or beneficiary shall be subject in any manner
to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or
charge, whether voluntary or involuntary, and any attempt to so anticipate,
alienate, sell, transfer, assign, pledge, encumber or charge the same shall be
void; nor shall any such distribution or payment be in any way liable for or
subject to the debts, contracts, liabilities, engagement or torts of any person
entitled to such distribution or payment.
Notwithstanding the foregoing, the right to a benefit payable with
respect to a Participant pursuant to a "qualified domestic relations order" (as
defined in Section 414(p) of the Code) may be created, assigned or recognized.
The Administrator shall establish reasonable procedures to determine the
qualified status of domestic relations orders and to administer distributions
under such qualified orders in a manner consistent with Section 414(p) of the
Code.
15.3 FACILITY OF PAYMENT
If the Administrator determines that any person entitled to payments
under the Plan is an infant or incompetent by reason of physical or mental
disability, the Administrator may cause all payments thereafter becoming due to
such person to be made to any other person for his benefit, without
responsibility to follow application of amounts so paid. Payments made pursuant
to this provision shall completely discharge the Plan, Administrator and the
Trustee.
15.4 SOURCE OF BENEFITS
The Trust Fund shall be the sole source of benefits under this Plan,
and each Employee, Participant, Beneficiary, or any other person who shall claim
the right to any payment or benefit under this Plan shall be entitled to look
only to the Trust Fund for payment of benefits. Except as may be otherwise
provided by ERISA or other applicable law, the Employer shall have no liability
to make or continue from its own funds the payment of any benefit under the
Plan.
15.5 LOST PARTICIPANTS OR BENEFICIARIES
If the Plan is unable to make payment to any Participant or
Beneficiary who is entitled to receive a Plan Benefit, because it cannot
ascertain the identity or whereabouts of such Participant or Beneficiary after
reasonable efforts have been made to identify or locate such person (including a
notice of the payment so due mailed to the last known address of such
Participant or Beneficiary as shown on the records of the Employer), such
payment and all subsequent payments otherwise due to such Participant or other
person shall be forfeited and used to reduce Employer contributions to the Plan
twenty-four (24) months after the date such payment first became due; provided,
however, that such payment and any subsequent payments shall be reinstated
retroactively, without interest, no later than sixty (60) days after the date on
which the Participant or Beneficiary is identified or located.
15.6 SERVICE IN SEVERAL FIDUCIARY CAPACITIES
Any person, group of persons, or entity, may serve in more than one
fiduciary capacity with respect to the Plan.
15.7 CONSTRUCTION OF PLAN
Headings to the articles, sections or subsections of the Plan have
been supplied for convenience only and are not to be taken as limiting or
extending the meanings of any of the provisions of the Plan.
<PAGE>
15.8 GOVERNING LAW
The provisions of the Plan shall be construed, administered and
governed under ERISA and, to the extent not preempted, the laws of the State of
California.
15.9 INTENT TO COMPLY WITH LEGAL REQUIREMENTS
The Employer intends that the Plan shall be a qualified plan of
deferred compensation established for the exclusive benefit of its Employees and
their Beneficiaries as provided for in Section 401(a) of the Code or as provided
for in any similar provisions of subsequent revenue laws and that the Plan
assets held by the Trustee shall be exempt from taxation under Section 501(a) of
the Code.
15.10 ANNUITY CONTRACTS
Any annuity contract purchased by the Plan and distributed to a
Participant shall provide that the benefits under the contract shall be provided
in accordance with the applicable consent, present value and other requirements
of Section 417(e) of the Code.
15.11 VOTING RIGHTS
Before each annual or special meeting of the Company's stockholders,
the Company shall cause to be sent to each Participant a copy of the proxy
statement being sent to the registered stockholders of the Company. A
Participant shall have the right to instruct the Trustee confidentially with
respect to the voting of all shares of FHC Stock, whether or not vested, that
were allocated to his or her Account on the applicable record date for such
meeting. The Company shall conclusively determine the number of the whole and
fractional shares of FHC Stock that are subject to each Participant's voting
instructions and shall advise the Trustee accordingly. The voting instructions
shall be on a form prescribed by the Company and shall be submitted to the
Trustee not later than the date specified by the Company. Once received by the
Trustee, the voting instructions shall be irrevocable. Under no circumstances
shall the Trustee permit the Company or any representative thereof to see any
voting instructions given by any Participant to the Trustee. The Trustee shall
vote any shares of FHC Stock with respect to which it has not received (prior to
the date specified by the Company) voting instructions on the prescribed form
from the appropriate Participants, in direct proportion to the shares with
respect to which it has received timely voting instructions from Participants.
<PAGE>
15.12 OTHER INSTRUCTIONS BY PARTICIPANTS
In the event that any person or group of persons makes a tender offer
subject to Section 14(d) of the Securities Exchange Act of 1934 to acquire all
or part of the outstanding shares of FHC Stock, including the Stock held in the
FHC Stock Fund ("Acquisition Offer"), each Participant shall be entitled to
direct the Trustee confidentially (on a form to be prescribed by the Company) to
tender all or part of those shares of FHC Stock which would then be subject to
such Participant's voting instructions under Section 15.11. If the Trustee
receives an instruction by the date communicated by the Company to Participants,
the Trustee shall tender such shares in accordance with such instruction. Any
shares of FHC Stock with respect to which the Trustee does not receive timely
instructions shall be tendered or withheld by the Trustee in the same proportion
as the shares with respect to which the Trustee has received timely instructions
from Participants. The Company shall distribute to each Participant all
appropriate materials pertaining to the Acquisition Offer, including the
statement of the position of the Company with respect to such offer issued
pursuant to Rule 14e-2 under the Securities Exchange Act of 1934, as soon as
practicable after such materials are issued; provided, however, that if the
Company fails to issue such statement within five business days after the
commencement of such offer, the Company shall distribute such materials to each
Participant without the statement by the Company and shall separately distribute
such statement as soon as practicable after it is issued. The Trustee shall
follow the procedures regarding the confidentiality of instructions described in
Section 15.11.
<PAGE>
ARTICLE 16
ROLLOVER CONTRIBUTIONS AND TRANSFERS
16.1 TRANSFERS FROM OTHER PLANS
In the event that an individual
(A) Becomes an Employee eligible to participate in the Plan, and
(B) Was a participant in a plan qualified under Section 401(a) of the
Code, the trust of which is exempt from tax under Section 501(a) of the Code,
and
(C) Received from such trust a "qualified total distribution" (within
the meaning of subsection 402(a)(5)(E) of the Code) which qualifies for rollover
treatment in accordance with Section 402(a)(5), and
(D) such "qualified total distribution" consists of money,
then, with the consent of the Company, the eligible Employee may
transfer any portion of the distribution, to the extent it exceeds the amount
referred to in subsection 402(e)(4)(D)(i) of the Code, to this Plan on or before
the sixtieth (60th) day after the day on which he received such distribution,
and upon receipt by the Plan, such amount shall be credited to the Rollover
Account established under the Plan, pursuant to Article 6.
Notwithstanding the foregoing, there may be transferred directly from
the trustee of another plan qualified under Section 401(a) of the Code, the
trust of which is exempt from tax under Section 501(a) of the Code, to the
Trustee, subject to the approval of the Administrator and the Trustee that such
transfer will not adversely affect the qualified status of the Plan, all or any
of the assets, including voluntary contributions, if any (whether by Trustee,
Custodian or otherwise) on behalf of the other plan which is maintained for the
benefit of any Employees who are about to become Participants in this Plan.
The eligible Employee shall have a one hundred percent (100%) vested
and nonforfeitable right to all amounts credited to his Rollover Account as a
result of any transfer pursuant to this Section.
16.2 ROLLOVER OF FUNDS FROM CONDUIT INDIVIDUAL RETIREMENT ACCOUNT (IRA)
In the event that an individual
(A) Becomes an Employee eligible to participate in the Plan, and
(B) Shall have established an Individual Retirement Account or
Individual Retirement Annuity (hereinafter collectively referred to as "IRA")
described in Sections 408(a) and 408(b), respectively, of the Code, which IRA is
comprised solely of amounts constituting a rollover contribution of a qualified
total distribution from an employer's trust described in Section 401(a) of the
Code, which is exempt from tax under Section 501(a) of the Code, or an annuity
plan described in Section 403(a) of the Code, and
<PAGE>
(C) Received from such IRA the entire amount of the account or the
entire value of the annuity, including any earnings on such sums, pursuant to
Section 408(d)(3)(A)(ii) of the Code,
then, with the consent of the Company, the eligible Employee may
transfer the entire amount received in such distribution to this Plan (for the
benefit of such individual) on or before the sixtieth (60th) day after the day
on which he received such payment or distribution, and upon receipt by the Plan,
such amount shall be credited to the Rollover Account established hereunder.
The Participant shall have a one hundred percent (100%) vested and
nonforfeitable right to all amounts credited to his Rollover Account as a result
of such IRA rollover.
16.3 MISTAKEN ROLLOVER
If it is determined that a Participant's rollover contribution did not
qualify under the Code for a tax free rollover, then as soon as reasonably
possible the balance in the Participant's Rollover Account shall be:
(A) Segregated from all other Plan assets;
(B) Treated as a non-qualified trust established by and for the
benefit of the Participant; and
(C) Distributed to the Participant.
Such a mistaken rollover contribution shall be deemed never to have
been a part of the Plan and shall not adversely affect the tax qualification of
the Plan under the Code.
<PAGE>
ARTICLE 17
TOP-HEAVY PROVISIONS
17.1 TOP-HEAVY PLAN DEFINED
This Article shall apply if the Plan is a "Top-Heavy Plan" as
hereinafter provided. The Plan shall be a "Top-Heavy Plan" in a Plan Year if,
as of the Determination Date the present value of the cumulative accrued
benefits (as calculated below) of all Key Employees exceeds sixty percent (60%)
of the present value of the accumulative accrued benefits under the Plan of all
Employees and Key Employees, but excluding the value of the accrued benefits of
former Key Employees.
In determining whether this Plan is a Top-Heavy Plan, all employers
that are aggregated under Sections 414(b), (c), (m) and (o) of the Code shall be
treated as a single employer. In addition, all plans that are part of the
Required Aggregation Group shall be treated as a single plan. The Plan shall
apply the special rules of Code Sections 416(g)(4)(A), (B) and (E) to determine
which Employees and which benefits are taken into account to determine whether
the Plan (or any other plan included in a Required Aggregation Group of which
the Plan is a part) is a Top-Heavy Plan.
Solely for the purpose of determining if the Plan, or any other plan
included in a Required Aggregation Group of which this Plan is a part, is Top-
Heavy, the accrued benefit of an Employee other than a Key Employee shall be
determined under (A) the method, if any, that uniformly applies for accrual
purposes under all plans maintained by the affiliated employers, or (B) if there
is no such method, as if such benefit accrued not more rapidly than the slowest
accrual rate permitted under the fractional accrual rate of Section 411(b)(1)(C)
of the Code.
For this purpose, the present value of an Employee's accrued benefit
is equal to the sum of (A) and (B) below:
(A) The sum of (i) the present value of an Employee's accrued
retirement income in each defined benefit plan which is included in the Required
Aggregation Group determined as of the most recent valuation date within the
twelve (12) month period ending on the Determination Date and as if the Employee
had terminated service as of such valuation date and (ii) the aggregate
distribution made with respect to such Employee during the five-year period
ending on the Determination Date from all defined benefit plans included in the
Required Aggregation Group and not reflected in the value of his accrued
retirement income as of the most recent valuation date. In determining present
value for all plans in the Required Aggregation Group, the actuarial assumptions
set forth for this purpose in the Employer's defined benefit plan shall be
utilized and the commencement date shall be determined taking any
nonproportional subsidy into account; and
(B) The sum of (i) the aggregate balance of his accounts in all
defined contribution plans which are part of the Required Aggregation Group as
of the most recent valuation date within the twelve (12) month period ending on
the Determination Date, (ii) any contributions allocated to such an account
after the valuation date and on or before the Determination Date, and (iii) the
aggregate distributions made with respect to such Employee during the five-year
period ending on the Determination Date from all defined contribution plans
which are part of the Required Aggregation Group and not reflected in the value
of his account(s) as of the most recent valuation date.
<PAGE>
17.2 OTHER DEFINITIONS
For the purposes of this Article, the following terms shall have the
following meanings:
(A) "Determination Date" means the last day of the preceding Plan
Year except that in the case of the first Plan Year, the term "Determination
Date" shall mean the last day of the Plan Year.
(B) "Employee" means (i) a current employee or (ii) a former employee
who performed services for the Employer during the Plan Year containing the
Determination Date or any of the four (4) preceding Plan Years.
(C) "Key Employee" means an Employee, a former Employee or the
Beneficiary under the Plan of a former Employee who, in the Plan Year containing
the Determination Date, or any of the four preceding Plan Years, is:
(1) An officer of the Employer having an annual Total
Compensation greater than fifty percent (50%) of the amount in effect under
Section 415(b)(1)(A) of the Code for any such Plan Year. Not more than fifty
(50) Employees or, if lesser, the greater of three (3) Employees or ten percent
(10%) of the Employees shall be considered as officers for purposes of this
subparagraph.
(2) One of the ten (10) Employees owning (or considered as
owning within the meaning of Section 318 of the Code) the largest interest in
the Employer, which is more than one-half percent (.5%) ownership interest in
value, and whose Total Compensation equals or exceeds the maximum dollar
limitation under Section 415(c)(1)(A) of the Code as in effect for the calendar
year in which the Determination Date falls.
(3) A five-percent (5%) owner of the Employer.
(4) A one percent (1%) owner of the Employer having an annual
Total Compensation from the Employer of more than $150,000.
Whether an Employee is a five percent (5%) owner or a one percent
(1%) owner shall be determined in accordance with Section 416(i) of the Code.
(D) "Non-Key Employee" means an Employee who is not a Key Employee.
(E) "Required Aggregation Group" means
(1) Each stock bonus, pension, or profit sharing plan of the
Employer in which a Key Employee participates and which is intended to qualify
under Section 401(a) of the Code; and
(2) Each other such stock bonus, pension or profit sharing plan
of an Employer which enables any plan in which a Key Employee participates to
meet the requirements of Section 401(a)(4) or Section 410 of the Code.
17.3 TOP-HEAVY VESTING
(A) If the Plan is a Top-Heavy Plan in a Plan Year, the
nonforfeitable percentage of the Account Balance of a Participant for such Plan
Year who is credited with an Hour of Service in such Plan Year shall be
determined in accordance with the vesting provisions described in Section 10.2
of the Plan.
(B) A Participant's nonforfeitable benefit shall not be less than his
vested Account Balance determined as of the last day of the last Plan Year in
which the Plan was a Top-Heavy Plan.
17.4 TOP-HEAVY CONTRIBUTIONS
(A) Solely in the event that any Participant who is a Non-Key
Employee is not covered by a defined benefit plan of the Employer which provides
the minimum benefit required by Section 416(c)(1) of the Code during a Plan Year
in which this Plan is a Top-Heavy Plan, the Employer contributions and
forfeitures allocated to each such Non-Key Employee who has not separated from
service by the end of the Plan Year shall be equal to not less than the lesser
of:
<PAGE>
(1) Three percent (3%) of such Participant's Total Compensation
in the Plan Year, or
(2) The greatest allocation, expressed as a percentage of
Compensation, made to any Participant who is a Key Employee.
(B) The percentage referred to in subparagraph (2) above shall be
determined by dividing the contributions and forfeitures allocated to the Key
Employee by such Employee's Compensation. The Employer shall make such
additional contribution to the Plan as shall be necessary to make the allocation
described above. The provisions of this Section apply without regard to
contributions or benefits under Social Security or any other Federal or State
law. An adjustment may be made to this Section, as permitted under Treasury
Regulations, in the event an employee is also entitled to an increased benefit
in any other Top-Heavy plan while it is in the Aggregation Group with this Plan.
(C) A Non-Key Employee who is otherwise entitled to a minimum
contribution under this Section shall not fail to receive the required minimum
contribution because the Employee is excluded from participation because the
Employee failed to make elective Deferred Salary Contributions under the Plan.
17.5 ADJUSTMENT TO LIMITATION ON ANNUAL ADDITIONS
(A) If the Employer also maintains a qualified defined benefit plan
(as defined in Section 3(35) ERISA and Section 414(j) of the Code) and which is
not part of a floor-offset arrangement (as defined in Section 414(k) of the
Code) the denominator of both the Defined Benefit Plan Fraction and Defined
Contribution Plan Fraction, as set forth in Section 5.6, for the limitation year
ending in such Plan Year will be adjusted by substituting one (1) for one and
twenty-five one hundredths (1.25) in each place the figure occurs.
(B) The adjustments referred to in paragraph (A) are not required if:
(1) the Plan would not be Top-Heavy if ninety percent (90%) were
substituted for sixty percent (60%) in Section 17.1, and
(2) Section 17.4(A) is adjusted by substituting four percent
(4%) for three percent (3%) where the figure occurs.
(C) The adjustments referred to in paragraph (A) above do not apply
to any Participant as long as no Employer contributions, forfeitures, salary
deferrals, or nondeductible voluntary contributions are allocated to such
Participant's Accounts and the Participant does not accrue any benefits under
any defined benefit plan maintained by the Employer.
<PAGE>
EXECUTION PAGE
The Company has caused this amended and restated Plan to be adopted effective
January 1, 1994, by having the Plan executed by its duly authorized officer this
22nd day of December, 1994.
FOUNDATION HEALTH CORPORATION
BY_________________________________
ITS_________________________________
<PAGE>
EXHIBIT 11.0
EARNINGS PER SHARE COMPUTATION
UTILIZING THE TREASURY STOCK METHOD
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, YEAR ENDED JUNE 30,
------------------------------ ------------------------------
1995 1994 1995 1994
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Proceeds upon exercise of options outstanding... $ 46,780 $ 85,792
-------------- --------------
-------------- --------------
Average market price of common stock............ $ 29.45 $ 40.70
-------------- --------------
-------------- --------------
Weighted average common shares outstanding...... 57,115,655 48,090,616
Issued shares -- exercise of options............ 1,863,165 3,377,157
Shares assumed to be repurchased with proceeds
from exercise.................................. (1,588,539) (2,108,026)
-------------- -------------- -------------- --------------
Weighted average shares outstanding (A)......... 57,390,281 49,359,747 54,780,162 48,688,221
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Net income (B).................................. $ 38,774 $ 21,656 $ 49,449 $ 93,641
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Earnings per share ((B) divided by (A))......... $ 0.68 $ 0.44 $ 0.90 $ 1.92
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
<PAGE>
EXHIBIT 12.0
FOUNDATION HEALTH CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------------
1991 1992 1993 1994 1995
--------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
1. EARNINGS
(a) Income before income taxes................... $ 43,797 $ 91,601 $ 136,999 $ 165,873 $ 78,532
(b) Interest expense, net........................ 11,031 6,035 4,239 12,709 11,555
(c) 1/3 operating rental expense................. 3,007 3,960 4,825 7,081 8,475
--------- ----------- ----------- ----------- ---------
Total........................................ $ 57,835 $ 101,596 $ 146,063 $ 185,663 $ 98,562
--------- ----------- ----------- ----------- ---------
--------- ----------- ----------- ----------- ---------
2. FIXED CHARGES
(a) Interest expense............................. $ 11,031 $ 6,035 $ 4,239 $ 13,446 $ 13,095
(b) 1/3 operating rental expense................. 3,007 3,960 4,825 7,081 8,475
--------- ----------- ----------- ----------- ---------
Total........................................ $ 14,038 $ 9,995 $ 9,064 $ 20,527 $ 21,570
--------- ----------- ----------- ----------- ---------
--------- ----------- ----------- ----------- ---------
Ratio (1 divided by 2):.......................... 4.1 10.2 16.1 9.0 4.6
--------- ----------- ----------- ----------- ---------
--------- ----------- ----------- ----------- ---------
</TABLE>
<PAGE>
EXHIBIT 13.1
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
Stockholders and Board of Directors
Intergroup Healthcare Corporation
We have audited the consolidated financial statements of Intergroup
Healthcare Corporation as of December 31, 1993 and 1992, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 1993. 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 generally accepted auditing
standards. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Intergroup Healthcare Corporation at December 31, 1993 and 1992, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1993 in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Tucson, Arizona
February 16, 1994, except
Note 17 as to which the date is
March 18, 1994
<PAGE>
EXHIBIT 13.2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Thomas-Davis Medical Centers, P.C.
Tucson, Arizona
We have audited the consolidated balance sheets of Thomas-Davis Medical
Centers, P.C. and Subsidiaries as of December 31, 1993 and 1992, and the related
consolidated statements of operations, cash flows, and changes in shareholders'
equity for the years then ended. 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 did not audit the
financial statements of Intergroup Healthcare Corporation, a 62.6% owned
subsidiary, which statements reflect total assets of $156,394,000 and
$135,051,000 as of December 31, 1993 and 1992, respectively, and total revenues
of $392,036,000 and $294,759,000, respectively, for the years then ended. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for Intergroup
Healthcare Corporation, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Thomas-Davis Medical Centers, P.C.
and Subsidiaries as of December 31, 1993 and 1992, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
STEVENSON, JONES & HOLMAAS P.C.
Tucson, Arizona
April 27, 1994
<PAGE>
EXHIBIT 13.3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of CareFlorida Health Systems, Inc.
We have audited the consolidated balance sheets of CareFlorida Health
Systems, Inc. and Subsidiaries as of December 31, 1993 and 1992, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the years then ended. 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 generally accepted auditing
standards. 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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CareFlorida
Health Systems, Inc. and Subsidiaries as of December 31, 1993 and 1992, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Miami, Florida
February 28, 1994
<PAGE>
EXHIBIT 21.0
SIGNIFICANT SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION
OF
NAME INCORPORATION
---------------------------------------------------------------------------------------------- -------------
<C> <S> <C>
1. California Compensation Insurance Company..................................................... California
2. Foundation Health, a California Health Plan................................................... California
3. Foundation Health Federal Services, Inc....................................................... Delaware
4. Intergroup Prepaid Health Services of Arizona, Inc.,
dba Intergroup of Arizona.................................................................... Arizona
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the: (1) Registration
Statement on Form S-8 (No. 33-36847) relating to the Foundation Health
Corporation Profit Sharing and 401(k) Plan, (2) Registration Statement on Form
S-8 (No. 33-36850) relating to the Foundation Health Corporation 1990 Stock
Option Plan, (3) Registration Statement on Form S-8 (No. 33-36849) relating to
the Foundation Health Corporation Employee Stock Purchase Plan, (4) Registration
Statement on Form S-8 (No. 33-44783) relating to the Non-Qualified Stock Option
Plan of Foundation Health Corporation, (5) Registration Statement on Form S-8
(No. 33-48561) relating to the 1992 Nonstatutory Stock Option Plan of Foundation
Health Corporation and the Foundation Health Corporation Incentive Common Stock
Option Agreement, (6) Registration Statement on Form S-8 (No. 33-53468) relating
to the Century MediCorp 1983 Incentive Stock Option Plan and Century MediCorp
1985, 1988, 1989 and 1991 nonstatutory stock option plans, (7) Registration
Statement on Form S-8 (No. 33-67062) relating to the 1989 Stock Plan of Business
Insurance Corporation, (8) Registration Statement on Form S-3 (No. 33-80512)
relating to the 1993 Nonstatutory Stock Option Plan of Foundation Health
Corporation, (9) Registration Statement on Form S-8 (No. 33-86568) relating to
the Intergroup Healthcare Corporation Stock Option and Incentive Plan and Stock
Option Agreement, and (10) Registration Statement on Form S-8 (No. 33-86566)
relating to the Foundation Health Corporation 1990 Stock Option Plan (as amended
and restated), of our report dated July 25, 1995, appearing in this Annual
Report on Form 10-K of Foundation Health Corporation for the year ended June 30,
1995.
DELOITTE & TOUCHE LLP
Sacramento, California
September 26, 1995
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the: (1) Registration
Statement on Form S-8 (No. 33-36847) relating to the Foundation Health
Corporation Profit Sharing and 401(k) Plan, (2) Registration Statement on Form
S-8 (No. 33-36850) relating to the Foundation Health Corporation 1990 Stock
Option Plan, (3) Registration Statement on Form S-8 (No. 33-36849) relating to
the Foundation Health Corporation Employee Stock Purchase Plan, (4) Registration
Statement on Form S-8 (No. 33-44783) relating to the Non-Qualified Stock Option
Plan of Foundation Health Corporation, (5) Registration Statement on Form S-8
(No. 33-48561) relating to the 1992 Nonstatutory Stock Option Plan of Foundation
Health Corporation and the Foundation Health Corporation Incentive Common Stock
Option Agreement, (6) Registration Statement on Form S-8 (No. 33-53468) relating
to the Century MediCorp 1983 Incentive Stock Option Plan and Century MediCorp
1985, 1988, 1989 and 1991 nonstatutory stock option plans, (7) Registration
Statement on Form S-8 (No. 33-67062) relating to the 1989 Stock Plan of Business
Insurance Corporation, (8) Registration Statement on Form S-3 (No. 33-80512)
relating to the 1993 Nonstatutory Stock Option Plan of Foundation Health
Corporation, (9) Registration Statement on Form S-8 (No. 33-86568) relating to
the Intergroup Healthcare Corporation Stock Option and Incentive Plan and Stock
Option Agreement, and (10) Registration Statement on Form S-8 (No. 33-86566)
relating to the Foundation Health Corporation 1990 Stock Option Plan (as amended
and restated), of our report dated February 16, 1994, except Note 17 as to which
the date is March 18, 1994, with respect to the consolidated financial
statements of Intergroup Healthcare Corporation for the years ended December 31,
1993 and 1992, appearing in this Annual Report on Form 10-K of Foundation Health
Corporation for the year ended June 30, 1995.
ERNST & YOUNG LLP
Tucson, Arizona
September 26, 1995
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the: (1) Registration
Statement on Form S-8 (No. 33-36847) relating to the Foundation Health
Corporation Profit Sharing and 401(k) Plan; (2) Registration Statement on Form
S-8 (No. 33-36850) relating to the Foundation Health Corporation 1990 Stock
Option Plan; (3) Registration Statement on Form S-8 (No. 33-36849) relating to
the Foundation Health Corporation Employee Stock Purchase Plan; (4) Registration
Statement on Form S-8 (No. 33-44783) relating to the Non-Qualified Stock Option
Plan of Foundation Health Corporation; (5) Registration Statement on Form S-8
(No. 33-48561) relating to the 1992 Nonstatutory Stock Option Plan of Foundation
Health Corporation and the Foundation Health Corporation Incentive Common Stock
Option Agreement; (6) Registration Statement on Form S-8 (No. 33-53468) relating
to the Century MediCorp 1983 Incentive Stock Option Plan and Century MediCorp
1985, 1988, 1989 and 1991 nonstatutory stock option plans; (7) Registration
Statement on Form S-8 (No. 33-67062) relating to the 1989 Stock Plan of Business
Insurance Corporation; (8) Registration Statement on Form S-3 (No. 33-80512)
relating to the 1993 Nonstatutory Stock Option Plan of Foundation Health
Corporation; (9) Registration Statement on Form S-8 (No. 33-86568) relating to
the Intergroup Healthcare Corporation Stock Option and Incentive Plan and Stock
Option Agreement; and (10) Registration Statement on Form S-8 (No. 33-86566)
relating to the Foundation Health Corporation 1990 Stock Option Plan (as amended
and restated), of our report dated April 27, 1994, appearing in this Annual
Report on Form 10-K of Foundation Health Corporation for the year ended June 30,
1995.
STEVENSON, JONES & HOLMAAS, P.C.
Tucson, Arizona
September 26, 1995
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to incorporation by reference in the: (1) Registration Statement
on Form S-8 (No. 33-36847) relating to the Foundation Health Corporation Profit
Sharing and 401(k) Plan, (2) Registration Statement on Form S-8 (No. 33-36850)
relating to the Foundation Health Corporation 1990 Stock Option Plan, (3)
Registration Statement on Form S-8 (No. 33-36849) relating to the Foundation
Health Corporation Employee Stock Purchase Plan, (4) Registration Statement on
Form S-8 (No. 33-44783) relating to the Non-Qualified Stock Option Plan of
Foundation Health Corporation, (5) Registration Statement on Form S-8 (No.
33-48561) relating to the 1992 Nonstatutory Stock Option Plan of Foundation
Health Corporation and the Foundation Health Corporation Incentive Common Stock
Option Agreement, (6) Registration Statement on Form S-8 (No. 33-53468) relating
to the Century MediCorp 1983 Incentive Stock Option Plan and Century MediCorp
1985, 1988, 1989 and 1991 nonstatutory stock option plans, (7) Registration
Statement on Form S-8 (No. 33-67062) relating to the 1989 Stock Plan of Business
Insurance Corporation, (8) Registration Statement on Form S-3 (No. 33-80512)
relating to the 1993 Nonstatutory Stock Option Plan of Foundation Health
Corporation, (9) Registration Statement on Form S-8 (No. 33-86568) relating to
the Intergroup Healthcare Corporation Stock Option and Incentive Plan and Stock
Option Agreement, and (10) Registration Statement on Form S-8 (No. 33-86566)
relating to the Foundation Health Corporation 1990 Stock Option Plan (as amended
and restated), of our report dated February 28, 1994, on our audits of the
consolidated financial statements of CareFlorida Health Systems, Inc. as of
December 31, 1993 and 1992 and for the years then ended, which report is
included in this Annual Report on Form 10-K of Foundation Health Corporation.
COOPERS & LYBRAND L.L.P.
Miami, Florida
September 25, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from Form 10-K
filed by Foundation Health Corporation for the year ended June 30, 1995 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<CASH> 203,937
<SECURITIES> 591,341
<RECEIVABLES> 280,071
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 230,278<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,964,207
<CURRENT-LIABILITIES> 0
<BONDS> 180,054
<COMMON> 571
0
0
<OTHER-SE> 756,328
<TOTAL-LIABILITY-AND-EQUITY> 1,964,207
<SALES> 2,403,132
<TOTAL-REVENUES> 2,459,924
<CGS> 0
<TOTAL-COSTS> 2,245,015
<OTHER-EXPENSES> 124,822
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,555
<INCOME-PRETAX> 78,532
<INCOME-TAX> 26,821
<INCOME-CONTINUING> 49,449
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,449
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0
<FN>
<F1>NET PP&E
</FN>
</TABLE>
